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Financial System

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Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS

Peter N. Ireland Department of Economics Boston College irelandp@bc.edu http://www2.bc.edu/~irelandp/ec261.html

Chapter 2: An Overview of the Financial System

1. Function of Financial Markets and Financial Intermediaries 2. Structure of Financial Markets Debt and Equity Markets Primary and Secondary Markets Exchanges and Over-the-Counter Markets Money and Capital Markets 3. Financial Instruments Money Market Instruments Capital Market Instruments 4. Role of Financial Intermediaries Transaction Costs and Economies of Scale Risk Sharing and Diversification Adverse Selection and Moral Hazard 5. Types of Financial Intermediaries Depository Institutions (Banks) Contractual Savings Institutions Investment Intermediaries This chapter provides an overview of the financial system in the US economy by describing the various types of financial markets, financial instruments, and financial institutions or intermediaries that exist.

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The chapter begins with a general statement that clarifies what function financial markets and financial intermediaries have in the economy as a whole. It then deals more specifically with: The structure of financial markets and the ways in which different types of financial markets can be distinguished. Here, it discusses debt versus equity markets, primary versus secondary markets, exchanges versus over-the-counter markets, and money versus capital markets. The various types of financial instruments, including both money market instruments and capital market instruments. The special role played by financial intermediaries in the economy. Here, it describes how financial intermediaries take advantage of economies of scale to reduce transaction costs, how financial institutions assist in the process of risk sharing and diversification, and how financial institutions overcome the problems of adverse

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