24: Financial System and Economic Growth Flashcards

1
Q

role of the financial system

A

channelling funds from households, businesses and governments with surplus funds to households, businesses and governments with a shortage of funds

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2
Q

direct finance

A

channels funds directly through the financial market

financial markets
- exchanges
- investment banking

financial instruments/securities
- equities
- bonds

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3
Q

indirect finance

A

channels funds through a financial intermediary

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4
Q

information challenges

A

financial intermediaries exist because of this

asymmetric information

free-rider problems

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5
Q

why does asymmetric information lead to a less efficient allocation of funds?

A

adverse selection

moral hazard

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6
Q

how do financial intermediaries solve asymmetric information problems?

A

issuing private loans to reduce free-rider problems

using credit standards to avoid adverse selection

imposing loan covenants to prevent moral hazard

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7
Q

role of the government

A

regulation

provision of a safety net

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8
Q

governments promoting transparency

A

disclosure of financial information from public firms

adherence to generally acceptable accounting standards

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9
Q

prudential regulation

A

rules the government sets to prevent banks from taking on too much risk

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10
Q

prudential supervision

A

activities the government engaged in to enforce prudential regulation

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11
Q

relationship between financial development and economic growth

A

increases in private credit lead to a more efficient allocation of credit, an increase in investment in more productive assets and faster economic growth

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