FINC 409 Lecture Notes - Lecture 2: Bretton Woods System, Repurchase Agreement, Monetarism
8 Sep 2016
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Key part of the economic and financial system: Deficit economic unit: spends more money than it brings in. Surplus economic unit: generates more money than it spends. Direct transfer an individual takes their excess cash and directly invest it into a deficit unit. In exchange, the individual gets stocks or bonds or other securities from that unit. Problem with this is that the individual does not know a lot of deficit units that needs investment and the deficit unit does not know a lot of individuals that want to invest. Indirect transfer (through investment banking firms) individual"s money goes to an investment banking firms the firm takes that money and invest it in the deficit unit. In exchange, the deficit unit takes gives the investment banking firm some sort of securities, which the firm gives to the individual. No new securities are created in this case. Same securities you would get in direct transfer.
