Essay on Monetary Policy and Core Principle

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Banking
Chapter 1: An introduction to Money and the Financial System 1. Six parts of the Financial system: * Money: we use money to pay for our purchases and to store our wealth. * Financial instruments: to transfer resources from savers to investors and to transfer risk to those who are best equipped to bear it. I.e.: stocks, mortgages, insurance policies or bonds. * Financial markets: allows us to buy and sell financial instruments quickly and cheaply. I.e.: The New York Stock Exchange, London Stock Exchange. * Financial institution: provide a myriad of services, including access to the financial markets and collection of information about prospective borrowers to ensure they are creditworthy. I.e.: banks, securities firms, insurance companies. * Government regulatory: they are responsible for making sure that the elements of the financial system-including its instruments, markets, and institutions-operate in a safe and reliable manner. * Central banks: monitor and stabilise the economy. The Federal Reserve System is the central bank of the United States. 2. The Five Core Principles of Money and Baking * Core Principle 1: Time has value * Core Principle 2: Risk requires compensation * Core Principle 3: Information is the basic for decisions * Core Principle 4: Markets determine prices and allocate resources * Core Principle 5: Stability improves welfare. 3. Apply the Concept a) Why do interest rates rise when inflation goes up? b) Why does a country’s exchange rate suddenly plummet? c) Why do large-scale frauds that damage investors occur repeatedly? d) Why is it important for central banks to be free of political influence? e) Can

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