Financial Markets Flashcards
Define financial markets
Any set of arrangements that allows buyers and sellers to come into contact for the purpose of trading financial services and assets
What are the uses of financial markets
QE —> allows for the purchasing of bonds from private institutions —> can increase AD via capital markets
Lending and saving —> households and businesses (retained profits)
Asset bubbles —> wealth effects
Market failure —> regulation, misselling (aggressive sales culture)
Speculation —> via FOREX markets and capital flight
Trade in shares —> allows investment for firms and can create wealth effects for the owners via dividends
Commodities —> purchasing ownership of volatile goods at a set price —> avoids problems of price fluctuation problems
Explain the types of market failure in financial markets
Asymmetric information —> financial providers have more info than their customers —> overconsumption occurs due to information failure e.g. PPI sold to individuals but banks failed to find out if these products were appropriate for the customers
Moral hazard —> economic agent making decision in their own interest knowing that if problems arise the cost is borne to third parties i.e. huge external costs, e.g. bankers took excessive risks knowing if they failed the government would bail them out —> 2008 financial crisis
Speculation and market bubbles —> result of herding behaviour, price becomes too high so investors sell, other investors sell too collapsing the price e.g. sub-prime mortgage crisis —> high default rate
Market rigging —> collusion to fix prices/exchanging information for gains at the expense of others.
Insider trading —> individual has inside knowledge about the future of an asset —> will sell or buy this asset to make a profit
Externalities —> behaviour by financial institutions led to government bailout, external costs on the taxpayer
Effects of collapse of bubbles
Increase in supply of asset + reduction in demand causes collapse
Negative wealth effect —> consumption and AD reduced —> negative multiplier
Harms consumer and business confidence
Short term demand side changes have long term supply side effects e.g. long lasting recession means long term unemployed may withdraw from labour force (loss of skills)
