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Fundamental Economic Questions

My son has just started his college career with a major in economics. He is curious as to the interrelationship between the success of an economy and the financial markets, concepts, and financial institutions. Accordingly, he has developed a list of questions addressing these issues.

What are the financial markets and what purposes do they serve?
What are financial intermediaries?
How do these intermediaries function in the economy?
What is a federal government budget deficit?
What is the national debt?
How does a budget deficit affect the economy?
He is also curious about the time value of money concepts.

Specifically, he has the following questions about these concepts:
Why are consumers considered to be risk averse?
What methods could used to deal with risk?
It has been said that a dollar received today is worth more than a dollar received tomorrow.
What does this mean and what is the significance to the economy?
What is the difference between the present value of a future sum of money and the future value of a present sum of money?
What is the significance of these concepts to economics?
If you deposited $1,000 in an account paying 6% interest compounded annually, how long would it take to double?

Solution Preview

1. What are the financial markets and what purposes do they serve?

Financial markets are places or structures where people can purchase or sell financial instruments. As a location, the financial market may be a place which is identified as a place for financial transactions e.g. The New York Stock Exchange.

The main objective, of a financial market, is to help the transfer of capital from people who have it (investors) to people who do not have.

2. What are financial intermediaries? How do these intermediaries function in the economy?

Financial intermediaries are institutions/people and organizations who help in the transfer of capital. The intermediaries are the neither the originators of the capital or the receivers. They simply help the owners of the capital to funnel they money into appropriate channels.

3. What is a federal government budget deficit? What is the national debt? How does a budget deficit ...

Solution Summary

The expert determines what the financial markets and purposes. Financial intermediaries are defined.

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