4.4 - AO1

Question 1

What are financial markets?

Answer 1

• A place where buyers and sellers can trade financial assets
• They act as an allocation mechanism by channelling money from people with too much (savers) to people with too little (borrowers)

Question 2

What is the role of financial markets?

Answer 2

• Facilitate savings; storing money for future use
• Lending to businesses and individuals; access to credit
• Facilitate exchange of goods and services; payment systems
• Provide forward markets; traders can buy in advance
• Provide market for equities; stock exchanges allows stocks to be traded

Question 3

Financial sector market failure

Answer 3

Where free financial markets fail to allocate financial products at the socially optimum level of output

Question 4

What are examples of financial market failure

Answer 4

• Asymmetric information; information gaps
• Moral hazard; government intervention
• Market rigging; distorting markets

Question 5

What are the roles of the central bank?

Answer 5

• To implement monetary policies
• Act as a banker to the government
• Act as a banker to the banks
• Regulate the financial systems

Question 6

Speculation

Answer 6

Buying and selling financial assets with the goal of making short-run profits

Question 7

Moral hazard

Answer 7

Occurs when an economic agent has an incentive to increase risk because if they fail someone else will face the consequences

Question 8

Market rigging

Answer 8

Occurs when a group of economic agents collectively make a decision that will actively distort markets to their favour. This will work in the favour of those who know about it and against the favour of those who don’t.