Introduction to Finance

LEARNING ACTIVITY
Go to the St. Louis Federal Reserve Bank’s website, http://www.stlouisfed.org, and access 
the Federal Reserve Economic Database (FRED). Find monetary base, money supply, and 
gross domestic product data. Calculate the money multiplier and the velocity of money.
Applying Finance To...
• Institutions and Markets 
Policy makers pass laws and imple-
ment fi scal and monetary policies. A change in law, as noted in 
Chapter 3, allows U.S. commercial banks again to engage in both 
commercial banking and investment banking activities and become 
universal banks. Policy makers infl uence and change the types of 
fi nancial institutions and their operations. The operations of deposi-
tory institutions are directly infl uenced by monetary policy decisions 
relating to reserve requirements and Fed discount rates. The ability of 
fi nancial institutions to carry out the savings-investment process also 
is aff ected by the actions of policy makers. 
• Investments 
The prices of securities, typically, refl ect economic 
activity and the level of interest rates. Real growth in the economy, 
accompanied by high employment and low interest rates, makes 
for attractive investment opportunities. Individual and institutional 
investors usually fi nd the values of their investments rising during 
periods of economic prosperity. However, there are times when 
policy makers fear that the loss of purchasing power associated with 
high infl ation outweighs the value of economic expansion. During 
these times, securities prices suff er.
• Financial Management
The operations of businesses are directly 
aff ected by policy makers. Fiscal and monetary policies that constrain 
economic growth make it diffi
cult for businesses to operate and make 
profi ts. Financial managers must periodically raise fi nancial capital 
in the securities markets. Actions by policy makers to constrain the 
money supply and to make borrowing more costly will give fi nancial 
managers many sleepless nights. On the other hand, expansive mon-
etary policy accompanied by low infl ation usually is conducive to 
business growth, lower interest rates, and higher stock prices—making 
it easier for fi nancial managers to obtain, at reasonable costs, the fi nan-
cial capital needed to grow their businesses.
Summary
LO 5.1 
The three major U.S. national economic policy objectives are 
economic growth, high employment, and price stability. On occa-
sion, confl icts among these objectives can develop. For example, 
too rapid economic growth could result in materials and/or labor 
shortages that, in turn, could lead to price instability associated with 
infl ation. 

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Review Questions