Five Core Principles Of Money And Banking Essay

1032 Words Jul 2nd, 2015 5 Pages
There are five core principles in money and banking. These five principles are important because they form the basis of the financial system and its interaction with the real economy, both currently and in the future. These principles work together to provide a consistent and unchanging foundation for understanding the ever evolving financial system. The five core principles are as follows: time, risk, information, markets and stability. Each of these principles will be explained in depth below.
The first core principle is time. The textbook explains that time is value. There is a monetary value assigned to an individual’s time, which is why people are paid salaries for the work they do. The textbook Money, Banking and Financial Markets state this concept as “An hour’s worth of work equals a certain amount of dollars (Cecchetti and Schenholtz, 5). Time also affects every financial transaction and financial institution’s value. Interest, whether earned through investments or paid on a loan, is partially determined by the amount of time that the money is being used for an alternative purpose. In regards to an investment, an individual must determine if the amount of interest earned on an investment or savings account is worth the time the money may be inaccessible. In reference to borrowing money, the longer amount of time an individual takes out to pay back a loan, the more in interest that individual will pay to the lender, in order to compensate that lender for letting…

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