Money and the Financial System Topic Index

EconData Online keeps you informed on today's most crucial economics data. Steve Hackett and Bud Culbertson (Humboldt State) provide commentary, analysis, and current and historical data. Return to EconData topic index.

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Consumer Price Index (CPI)

Inflation implies a declining purchasing power of money. If inflation rates are relatively stable, then the financial system can adapt to the inflation rate by setting appropriate interest rates on borrowed money. When inflation rates become unstable and suddenly rise to unanticipated levels, lenders are made worse off, and can even experience negative real interest rates. While interest rates on new loans can rise, some banks may fail if the high inflation rate persists and they are receiving negative real interest rates on much of their loan portfolio.

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Stock Prices: S&P 500

The issuance of stock is one of the mechanisms by which firms raise external funds for capital investment and expansion (the other being borrowing, such as by issuing bonds). A key difference between stocks and bonds is that stockholders are owners of the firm, while bondholders are lenders and do not have an ownership stake.

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