5. Financial Development

Question 1

Moral Hazard

Answer 1

Moral Hazard may occur when the actions of one party may change to the detriment of another after a financial transaction has taken place

Question 2

Five views

Answer 2

View 1: Finance promotes growth
View 2: Finance hurts growth
View 3: Finance follows growth
View 4: Finance doesn’t matter
View 5: Finance matters because financial crisis hurt growth

Question 3

Paper - King and Levine
Possible explanations of the positive correlations between measures of financial development and different proxies of economic growth

Answer 3

• Reverse Causality

- Omitted Factor

Question 4

Reverse Causality

Answer 4

you need coffee to wake up, but from too much coffee you can’t sleep, therefore you had not enough sleep and can’t wake up and therefore you need the coffee again to wake up

Question 5

Omitted Factor

Answer 5

Because it is dry, hot and sunny, people eat ice cream and get a sunburn. Therefore, there is a correlation between the amount of ice cream eaten and the amount of sunburns, but this correlation is due to a different factor, namely the sun

Question 6

Paper - King and Levine

Main findings financial development

Answer 6

• The financial system can promote economic growth
• Financial development measures are strongly associated with
  real per capita GDP growth, rate of physical capital accumulation, efficiency improvements
• Higher financial development = faster rates of economic growth