Financial Markets

Question 1

What are the four key roles of central banks?

Answer 1

implement monetary policy, banker to the government, banker to banks (lender of last resort), regulation of the financial industry

Question 2

What are the examples of financial market failure?

Answer 2

asymmetric info, externalities, moral hazard, speculation and bubbles, market rigging

Question 3

Asymmetric Info - Explanation and contextual example

Answer 3

Seller of asset has more information than the buyer.
Or a person taking a loan knows more about their liability than the lender.
PPI scandal ( mis selling of insurance) - divorce between ownership and control

Question 4

Financial Makret Externaitlties

Answer 4

Cost of the financial crisis £140 bn bank bailout

Question 5

Moral Hazard - Financial Markets

Answer 5

Banks provide excessively risky loans as dependent on bailout

Question 6

Speculation/ Asset bubbles

Answer 6

Non rational behaviour
Physiological causes vs Policy explanations (QE)

Question 7

Market rigging

Answer 7

When there is collusive behaviour between players in the financial market.
Libor scandal - market rates were fixed