Topic 1:

The six essential elements of the financial system are
as follows:

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1)     The
Lenders and the Borrowers

a.      These
are the participants of the system, but are not institutions such as banks (Faure,
2013)

2)     Financial
Intermediaries

a.      Go-betweens
for the lenders and the borrowers. Examples include banks and mutual funds (Financial
Intermediary, n.d).

3)     Financial
Instruments

a.      Loans,
CDs, Bonds and so on…

4)      Money Creation

a.      Banks
do this by lending you money but their capacity to do so is limited by their
reserves (How the Fed Creates Money, n.d).

b.     The
Federal Reserve does this by buying treasury bills and can essentially create
money from nothing (How the Fed Creates Money, n.d).

5)     Financial
Markets

a.      Examples:
Stock Market/Real Estate Market

b.     This
is “where” people go to buy and sell financial instruments.

6)     Price
Discovery

a.      People
and institutions have to be able to know what the price of money or debt is….In
other words, they have to be able to determine what interest rates are.

 

References

Faure, A. (2013). Financial System: An
Introduction (1st ed., p.
9). Quoin Institute. Retrieved from
http://bookboon.com/en/financial-system-an-introduction-ebook

Financial Intermediary (n.d). Retrieved January 10,
2018, from https://www.investopedia.com/terms/f/financialintermediary.asp

How the Fed Creates Money. (n.d.). Retrieved
January 10, 2018, from http://www.ncpa.org/pub/ba611

Topic 2:

What is an “illiquidity premium”

Liquidity refers to the ease at which an investment
can be converted into cash. An “Illiquidity Premium” is charged for an investment
that cannot easily be converted to cash, at its market price (Staff, 2015).

References

Liquidity Premium (n.d). Retrieved January 10, 2018,
from https://www.investopedia.com/terms/l/liquiditypremium.asp

Topic 3:

What is the Fisher Equation and how does it affect interest
rates?

The Fisher Equation provides a method to determine the
real interest rate given the nominal rate and the rate of inflation (The Fisher
Equation, n.d). An example might look like the following:

–         
I make an investment that earned 12% over
the course of a year…

–         
Inflation was 4% over the same time period…

–         
Using the Fisher Equation, you get a real
rate of return of 8%…

The Fisher Equation does not affect interest rates, it
describes the relationship between real and nominal rates.

References

The Fisher Equation: Nominal and Real Interest Rates (n.d.).
Retrieved January 10, 2018, from
https://saylordotorg.github.io/text_macroeconomics-theory-through-applications/s20-14-the-fisher-equation-nominal-an.html