4.4 The Financial Sector

Question 1

What are Financial Markets?

Answer 1

• Where buyers and sellers can buy and trade a range of goods and services that are fundamentally monetary in nature

(basically a market to buy and sell goods for money)

Question 2

What is the 5 roles of Financial Markets?

Answer 2

• Facilitate savings (hold money as stocks)
• Lending (to allow consumption and investment)
• Provide forwards markets (Guaranteed future pricing for goods)
• Facilitate exchange for goods and services (by creating a payment system)
• Provides market for equities

Question 3

What are the 5 types of market failure in financial markets?

Answer 3

• Asymmetric Information
• Externalities
• Moral Hazard (individuals who make decisions in their own best interest, knowing there are potential risks)
• Speculation and Market Bubbles (e.g, housing bubbles)
• Market Rigging (groups who collude to fix prices)

Question 4

What are the 4 roles of the Central bank?

Answer 4

• Control monetary policy
• Act as Banker to the government
• Act as Bank to other Banks
• regulate the financial system