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Function of Financial Markets1. Allows transfers of funds from person or business without investment opportunities to one who has them2. Improves economic efficiency
Function of Financial IntermediariesFinancial Intermediaries1. Engage in process of indirect finance2. More important source of finance than securities markets3. Needed because of transactions costs and asymmetric informationTransactions Costs1. Financial intermediaries make profits by reducing transactions costs2. Reduce transactions costs by developing expertise and taking
advantage of economies of scaleRisk Sharing1. Create and sell assets with low risk characteristics and then use the
funds to buy assets with more risk (also called asset transformation).2. Also lower risk by helping people to diversify portfolios
Money: What and WhyEconomist’s Meaning of Money1. Anything that is generally accepted in payment for goods and services2. Not the same as wealth or income
Functions of Money1. Medium of exchange2. Unit of account3. Store of value
Evolution of Payments System1. Precious metals like gold and silver2. Paper currency (fiat money)3. Checks4. Electronic means of payment5. Electronic money: Debit cards, Stored-value cards, Smart cards, E-