1.6 Chapter Summary and Study Questions

Financial markets refer to any marketplace where the trading of securities occurs, including the stock market, bond market, foreign exchange (forex) market, and derivatives market. Financial markets are vital to the smooth operation of capitalist economies because they allocate resources and create liquidity for businesses and entrepreneurs.

Major financial markets include the stock market, bond market, money market, derivatives market, foreign exchange market, commodities market, and cryptocurrency market.

Depository institutions play an important part in the operation of financial markets. These institutions include commercial banks and thrift institutions—savings and loan associations, mutual savings banks, and credit unions.

The regulation of commercial banks and other financial intermediaries is another important aspect of financial markets. Such regulation is the result of the need of some central authority to monitor and control the money supply, reduce the level of risk to which bank depositors are exposed, and maintain bank solvency. Bank regulators include the Federal Reserve, U.S. Comptroller of the Currency, Federal Deposit Insurance Corporation, and state banking commissions.

The U.S. Congress has explicitly stated that the Federal Reserve’s goals should be maximum employment and stable prices. These goals have come to be known as the Federal Reserve’s “dual mandate.” To achieve these goals, the Federal Reserve conducts monetary policy, the management of money and interest rates. These variables are linked to changes in aggregate economic activity (output and employment) and inflation. The possibility of hyperinflation and deflation are concerns of the Federal Reserve.

The study of money, banking, and financial markets is well suited to understanding issues and events that impact our daily lives. Many people find meaningful careers in banking and finance.