Chapter 2 Financial Market€¦ · Chapter 2 Financial Market Ibrahim Sameer (MBA - Specialized in...
Transcript of Chapter 2 Financial Market€¦ · Chapter 2 Financial Market Ibrahim Sameer (MBA - Specialized in...
Chapter 2
Financial MarketIbrahim Sameer (MBA - Specialized in Finance,
B.Com – Specialized in Accounting & Marketing)
www.ibrahimsameer.wordpress.com
Overview of Financial Markets
Money & Capital Market
Money & Capital Market
Money Market – T-Bill
Money Market – Commercial
Paper
Money Market – Certificate of
Deposits
Capital Market – Shares
Capital Market – Bonds
Economic System
• There are many different types of economic
systems that include capitalism (Free Market),
communism, and socialism.
Capitalism
• Capitalism is an economic system in which the
means of production of goods or services are
privately owned and operated for a profit.
Capitalism
• In capitalism, individuals are given the freedom to
operate their business as they want and manage
their own income.
Capitalism
• Capitalism applies to every person who operates
within this system; therefore, business owners and
employees are equally represented within the
capitalism model.
Capitalism
• In terms of business operations, capitalism gives
the most freedom and flexibility to owners.
Capitalism
• Beyond taxation and standard regulatory laws, the
government does not control how the business is
operated or how the income is used.
Communism
• Visualize a world where everyone has equal
amounts of wealth.
Communism
• Everyone has equal amounts of land, equal-sized
houses, the same government-issued cars, the
same government-issued stoves, the same
government-issued cell phones, etc. Although
people do different jobs, they all get paid the same.
Since everyone is equal, there are no social
classes. In fact, there isn't even a need for money.
People do not need to fight because all materials
are shared in common through the government.
Communism
• In simple term it can define as:
Socialism
• Socialism is a populist economic and political
system in which the means of production operate
under public political ownership, sometimes called
common ownership.
Socialism
• In Socialism the price is set by government.
How Government Intervene
Economy
• Government can intervene market into 2 different
ways:
• Fiscal Policy
• Monetary Policy
Fiscal Policy
• Imagine that Ali is sick. He's at home right now,
and the doctor's been called.
Fiscal Policy
• The doctor chooses one or two of the tools in his
toolkit and uses them on the patient.
Fiscal Policy
• Now imagine the patient is the whole economy.
The economy has entered a slowdown that has
now turned into a full-blown recession.
Fiscal Policy
• Unemployment is high, and people are fearful of
their financial future.
Fiscal Policy
• The government uses its own fiscal policy toolkit,
like a doctor, to administer fiscal policy tools - like
government spending, taxes and transfer
payments - to help strengthen aggregate demand
when it's weak.
Fiscal Policy
• The fiscal policy is the use of government
spending, taxation and transfer payment to
influence aggregate demand and therefore, real
GDP.
Government Spending
• Government spending includes the purchase of
goods and services - for example, a fleet of new
cars for government employees or missiles for
national defense. Government spending is a fiscal
policy tool because it has the power to raise or
lower real GDP. By adjusting government
spending, the government can influence economic
output.
Government Spending
• In addition to the primary effect of government
spending on the economy, this spending multiplies
through the economy as it affects businesses who
sell the goods and services bought by the
government. Consumers then go on to spend the
paychecks they earn from those businesses,
stimulating real GDP even more.
Government Spending
• For example, when Alifulhubey's Limos receives a
large order for more government vehicles, his
sales increase, and he hires more employees who
earn a paycheck from the company.
Government Spending
• Once they cash their paycheck, they spend this
money on goods and services, and the effect of a
single increase in government spending now leads
to a much greater result - an effect that economists
call the multiplier effect.
Taxes
• Taxes are a fiscal policy tool because changes in
taxes affect the average consumer's income, and
changes in consumption lead to changes in real
GDP.
Taxes
• So, by adjusting taxes, the government can
influence economic output. Taxes can be changed
in several ways. Firstly, marginal tax rates can be
raised or lowered. Secondly, they can be
eliminated entirely, or the tax rules can be
modified.
Transfer Payment
• Transfer payments include things like Social
Security, welfare or unemployment checks.
Transfer Payment
• These checks go out all over the country on a
monthly basis and serve as the income for tens of
millions of consumers. Transfer payments are
fiscal policy tools in the same way that taxes are
because changes in transfer payments lead to
changes in consumer income, and when
consumers spend more of their income, this
influences economic output.
Monetary Policy
• Monetary policy consists of the decisions made by
a government concerning the money supply and
interest rates. In the Maldives, the Maldives
Monetary Authority (MMA) determines and
implements monetary policy.
Monetary Policy
• Monetary policy consists of the decisions made by
a government concerning the money supply and
interest rates. In the Maldives, the Maldives
Monetary Authority (MMA) determines and
implements monetary policy.
MMA Monetary Policy
• MMA can affect the supply of money in the
economy by changing the amount of money that
banks must hold in reserves. It can use three
different tools to do this:
Change Reserve Requirements
• MMA has regulatory authority over banks, which
means it can require banks to change their reserve
requirements.
Change the Discount Rate
• MMA can also change the discount rate, which is
the interest rate that it gives to banks when they
borrow money from MMA in the short-term to meet
minimum reserve requirements. If MMA charges a
high interest rate, banks will be less likely to
borrow money from MMA. On the other hand, if
MMA charges a low interest rate, then banks may
be willing to borrow, which means that they may
make more loans.
Open-Market Operations
• Where the MMA buys or sells government
securities, such as Treasury bills, Treasury notes,
and Treasury bonds, on the open market. If the
MMA buys, it is increasing the supply of money in
the economy because it is trading MVR for the
securities. On the other hand, if the MMA sells, it is
decreasing the supply of money because it is
sucking up MVR from the economy and giving out
federal securities. Open-market operations is the
tool used the most in recent years.
Structure of Financial System in
Maldives
Structure of Financial System in Maldives
Financial Institution
Banking Non Banking
Financial Market
Money Market Capital Market
Corporate securities
Government securities
Derivatives
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Questions & Answers
Thank You
Ibrahim SameerSeek knowledge from cradle to grave