5.2 The Financial Sector

Question 1

What are financial liquid assets

Answer 1

They are exchanged in a financial market

For example, the stock market and the bond market

Question 2

What are the roles of the financial sector in the real economy

Answer 2

To facilitate saving

To lend to businesses and individuals

To facilitate the exchange of goods and services

To provide forward markets in currencies and commodities

Question 3

Why is a secure and stable financial sector key

Answer 3

It is required in order to promote economic development

Without a financial sector, consumers and firms cannot generate sufficient savings to make the macroeconomy stable

Question 4

What is meant by Microfinance

Answer 4

This involves borrowing small amounts of money from lenders to finance enterprises

It increases the incomes of those who borrow and can reduce dependency on primary products

Could lead to a multiplier effect from the investment of the loan

Question 5

What are the roles of the financial sector in promoting economic development

Answer 5

Financial sector facilitated saving which provides funds for investment

Helps enable control and management of the economy

Enables firms to raise capital

Facilitates borrowing which may encourage investment or enable business expansion

Governments are able to raise short and long term funds through issuing bonds

Question 6

What is meant by a foreign currency gap

Answer 6

This exists when the country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments

The value of the current account deficit is larger than the value of capital inflows

Question 7

What is meant by capital flight

Answer 7

This is when capital and money leave the economy through investment in foreign economies

Triggered by an economic threat such as hyperinflation or rising tax rates

Can worsen an economic crisis and cause currency to depreciate