4.4.1 The Role of the Financial Sector

Question 1

What is a financial market?

Answer 1

Where buyers and sellers can meet and can trade goods and services fundamentally in a monetary value

Question 2

What are the 4 roles of a financial markets?

Answer 2

• to facilitate saving
• lend to businesses and individuals
• facilitate exchange of goods and services
• provide forward markets

Question 3

Explain the facilitate saving role of financial markets?

Answer 3

Allows people to transfer their spending power from the present to the future. Can be done by saving money, and holding stocks and shares

Question 4

Explain the lend to businesses and individuals role of financial markets?

Answer 4

Allows consumption and investment. The step between taking money from one person and giving it to another

Question 5

Explain the facilitate the exchange of goods and services role of financial markets?

Answer 5

Create a payment system. Central banks create money, institutions process cheque transactions and buy and sell foreign currencies

Question 6

Explain the provide forward markets role of financial markets?

Answer 6

Where firms are able to buy and sell goods and services at a set price. Helper provide stability

Question 7

What are the 5 market failures that exist in the financial sector?

Answer 7

• asymmetric information
• externalities
• moral hazards
• speculation and market bubbles
• market rigging

Question 8

Explain asymmetric information?

Answer 8

Financial institutions have more knowledge than consumers. This means they can sell them products they do not need.

Question 9

Explain externalities?

Answer 9

Number of costs placed on consumers, firms and the government that the sector does not pay. Cost to the tax payer for bailing out the banks

Question 10

Explain moral hazard?

Answer 10

When people make decisions knowing there is a potential risk. Workers take risk to increase their salary. Employers sold mortgages to consumers knowing they will not pay them back

Question 11

Explain speculation and market bubbles?

Answer 11

All markets speculates leading to market bubbles. People buy a price before it rises, for profit. This leads to hearding behaviour, example is a housing market

Question 12

Explain market rigging?

Answer 12

When institutions collude to fix or exchange information that will lead to gain for themselves. One example is insider trading when people have information about a market others do not have.