Alright. So now let's learn some details about the financial system and let's start off with a few key definitions. We're going to be talking about in the next few videos the financial system. This is the idea that there are households that are saving some of their money. In general, households save some of their money while firms need money to invest in long-term assets. So the money that households are saving is being invested by firms. They're going to borrow that money and invest it, okay? The financial system is the group of markets where these firms are acquiring funds from savers. So the households are saving money and the firms are borrowing that money to invest, right? Financial markets, when we talk about the group of financial markets, well, there are tons of different financial markets, and I'm sure you've heard of some of them. Markets for purchase and sale of financial securities such as stocks and bonds, right? When we think about a firm selling stock to the public or selling bonds to the public, well, this happens in financial markets, right? This is exactly what happens. The firms are going to be selling securities. So this is how financial markets work. The firm sells a security to the household. So the household now has this financial investment, right? This security is a financial investment for the household, and then the household gives cash, right? Cash to the firm, and the firm needs that to make investments in, say, long-term assets like a new factory, machinery, things like that, right? So the financial market facilitates that. It gives the firms the ability to sell things to the household, these securities to the household to raise cash, right? So they can have cash. When we talk about investment in this class, just like we just said, the household makes an investment in these securities; well, that's a financial investment. When we talk about investment specifically in economics, financial investments are economic investments, and that deals with this definition here. Current resources are devoted to increasing future output, right? We've talked about this before. So when we talk about the term investment, well, there are 2 types of investments, right? Financial investments and economic investments. Our focus mostly in this course is on economic investments, but they do like to talk about financial investments as well. So these are generally made by households, "financial investments". And I'm going to put that in quotations here "households" because yes, firms can also buy stock and bonds of other firms, right? But in general, the idea here is that the households are making these investments; stocks and bonds are the most common financial investments compared to economic investments that are made by firms. So firms are the ones who buy factories, machinery, right? These long-term assets. I'll put LT Assets that they use to grow their business to increase future production, right? Just like we have in our definition, current resources devoted to increasing future production. So they're taking some of their resources now and devoting it to building a factory. Well, they're not going to increase production now. They're building a factory that will increase production in the future, okay? So that's generally what we're talking about when we talk about investment in this class and in the future videos coming up, okay? Just like we have up here, this financial market that we showed up here, well sometimes it's not directly that the firms are directly selling a security to the households. Sometimes, there's what's called financial intermediaries that we have right here, financial intermediaries and these are firms that act as a middleman. So, instead of let's say, Apple selling stock directly to you, well, there could be an intermediary, some sort of investment bank or some sort of mutual fund in the middle that makes the process a little easier of raising the money and selling the securities. So I'm going to draw a little diagram down here where we have a little space here. So we might have something like this. I'll do it down here. So we'll have firms and then in the middle, we'll have the intermediary, and then over here, households. I'm going to put h h for households. Right? So the firm here, sells securities. I'll put securities instead of sell. So security goes from the intermediary to the firm or, excuse me. The firm sells, let's say their stock. The firm of Apple stock gets bought by the intermediary. Let's say a mutual fund and the intermediary gives them the cash. So there we go. The firm is able to get the cash right away. Right? But now what the intermediary does is it sells, let's say stocks in the mutual fund. So the mutual fund. So now instead of buying shares in Apple stock, you might buy shares in this mutual fund of a bunch of different stocks together. And now you bought instead of a share of Apple, you bought a share of a mutual fund. And that mutual fund constitutes a lot of different types of shares. We'll talk a little bit more about mutual funds in the future, but this is the idea of a financial intermediary. So now notice, the intermediary is able to make the movement of the cash more rapid because they're able to buy the securities and give the cash immediately to the firm rather than finding household buyers while the intermediary is going to take care of that. The intermediary can now advertise their mutual fund and sell the mutual fund and raise that cash back here, right? So they'll make some money on fees or whatever they charge, to make money for facilitating this. Cool? So that's what the financial intermediary does. They're basically this middleman between the firm and the household that facilitates the movement of the cash. Let's take a quick pause here and we'll talk about these three goals that the financial system accomplishes.
Table of contents
- 1. Introduction to Macroeconomics1h 57m
- 2. Introductory Economic Models59m
- 3. Supply and Demand3h 43m
- Introduction to Supply and Demand10m
- The Basics of Demand7m
- Individual Demand and Market Demand6m
- Shifting Demand44m
- The Basics of Supply3m
- Individual Supply and Market Supply6m
- Shifting Supply28m
- Big Daddy Shift Summary8m
- Supply and Demand Together: Equilibrium, Shortage, and Surplus10m
- Supply and Demand Together: One-sided Shifts22m
- Supply and Demand Together: Both Shift34m
- Supply and Demand: Quantitative Analysis40m
- 4. Elasticity2h 26m
- Percentage Change and Price Elasticity of Demand19m
- Elasticity and the Midpoint Method20m
- Price Elasticity of Demand on a Graph11m
- Determinants of Price Elasticity of Demand6m
- Total Revenue Test13m
- Total Revenue Along a Linear Demand Curve14m
- Income Elasticity of Demand23m
- Cross-Price Elasticity of Demand11m
- Price Elasticity of Supply12m
- Price Elasticity of Supply on a Graph3m
- Elasticity Summary9m
- 5. Consumer and Producer Surplus; Price Ceilings and Price Floors3h 40m
- Consumer Surplus and WIllingness to Pay33m
- Producer Surplus and Willingness to Sell26m
- Economic Surplus and Efficiency18m
- Quantitative Analysis of Consumer and Producer Surplus at Equilibrium28m
- Price Ceilings, Price Floors, and Black Markets38m
- Quantitative Analysis of Price Ceilings and Floors: Finding Points20m
- Quantitative Analysis of Price Ceilings and Floors: Finding Areas54m
- 6. Introduction to Taxes1h 25m
- 7. Externalities1h 3m
- 8. The Types of Goods1h 13m
- 9. International Trade1h 16m
- 10. Introducing Economic Concepts49m
- Introducing Concepts - Business Cycle7m
- Introducing Concepts - Nominal GDP and Real GDP12m
- Introducing Concepts - Unemployment and Inflation3m
- Introducing Concepts - Economic Growth6m
- Introducing Concepts - Savings and Investment5m
- Introducing Concepts - Trade Deficit and Surplus6m
- Introducing Concepts - Monetary Policy and Fiscal Policy7m
- 11. Gross Domestic Product (GDP) and Consumer Price Index (CPI)1h 37m
- Calculating GDP11m
- Detailed Explanation of GDP Components9m
- Value Added Method for Measuring GDP1m
- Nominal GDP and Real GDP22m
- Shortcomings of GDP8m
- Calculating GDP Using the Income Approach10m
- Other Measures of Total Production and Total Income5m
- Consumer Price Index (CPI)13m
- Using CPI to Adjust for Inflation7m
- Problems with the Consumer Price Index (CPI)6m
- 12. Unemployment and Inflation1h 22m
- Labor Force and Unemployment9m
- Types of Unemployment12m
- Labor Unions and Collective Bargaining6m
- Unemployment: Minimum Wage Laws and Efficiency Wages7m
- Unemployment Trends7m
- Nominal Interest, Real Interest, and the Fisher Equation10m
- Nominal Income and Real Income12m
- Who is Affected by Inflation?5m
- Demand-Pull and Cost-Push Inflation6m
- Costs of Inflation: Shoe-leather Costs and Menu Costs4m
- 13. Productivity and Economic Growth1h 17m
- 14. The Financial System1h 37m
- 15. Income and Consumption52m
- 16. Deriving the Aggregate Expenditures Model1h 22m
- 17. Aggregate Demand and Aggregate Supply Analysis1h 18m
- 18. The Monetary System1h 1m
- The Functions of Money; The Kinds of Money8m
- Defining the Money Supply: M1 and M24m
- Required Reserves and the Deposit Multiplier8m
- Introduction to the Federal Reserve8m
- The Federal Reserve and the Money Supply11m
- History of the US Banking System9m
- The Financial Crisis of 2007-2009 (The Great Recession)10m
- 19. Monetary Policy1h 32m
- 20. Fiscal Policy1h 0m
- 21. Revisiting Inflation, Unemployment, and Policy46m
- 22. Balance of Payments30m
- 23. Exchange Rates1h 16m
- Exchange Rates: Introduction14m
- Exchange Rates: Nominal and Real13m
- Exchange Rates: Equilibrium6m
- Exchange Rates: Shifts in Supply and Demand11m
- Exchange Rates and Net Exports6m
- Exchange Rates: Fixed, Flexible, and Managed Float5m
- Exchange Rates: Purchasing Power Parity7m
- The Gold Standard4m
- The Bretton Woods System6m
- 24. Macroeconomic Schools of Thought40m
- 25. Dynamic AD/AS Model35m
- 26. Special Topics11m
14. The Financial System
Financial System Definitions
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