2

The Financial System and the Level of Interest Rates

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Alex Wong/Getty Images, Inc.

Learning Objectives

image Describe the role of the financial system in the economy and the two basic ways in which money flows through the system.

image Discuss direct financing and the important role that investment banks play in this process.

image Describe the primary, secondary, and money markets, explaining the special importance of secondary and money markets to business organizations.

image Explain what an efficient market is and why market efficiency is important to financial managers.

image Explain how financial institutions serve the needs of consumers, small businesses, and corporations.

image Compute the nominal and the real rates of interest, differentiating between them.

One of the most important institutional players in ...

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