4.4 Financial Sector

Question 1

Define speculative bubbling

Answer 1

When the market price for a financial asset is higher than it should be. For example a speculative boom in housing, crypto, bond prices.

Question 2

Define asymmetric information

Answer 2

occurs as a result of an imbalance between different economic agents.
e.g. a borrower has better inforamtion on wether or not they can repay a loan than a lender. a

Question 3

Define moral hazard

Answer 3

when an individual or firm takes greater risks than they should do because they are covered by the government or insurance - this leads to reckless behaviour and excessive risk taking.

Question 4

Define market rigging

Answer 4

manipulation of financial markets to gain an unfair advantage. (form of anti-competitive behaviour)

examples:
- rigging interest rates
- monopoly power affecting consumer and social welfare
- trading and market manipulation

Question 5

Define externalities and how it can affect the financial sector?

Answer 5

Spill over effects that affect third parties not directly involved in a transaction.

Excessive sub-prime lending by financial institutions leads to systemic risks. Systemic risks is where an event occuring at micro-level spreads and triggers instability or a collapse of an entire economy.