financial markets and systems Flashcards
1
Q
Some say that “the market is always right”. Do the course notes and/or teacher believe that this is so? Explain why or why not. (5 marks)
A
- regulated, resilient financial systems are essential for macroeconomic and financial stability in a world of increased capital flows (information asymmetry, transaction costs, pool savings & risk) 2. assumptions: perfect competition, perfect knowledge, rational behavior 3. booms & busts 4. political system 5. creation of money & credit by financial system can lead to imbalances and crisis
2
Q
Identify five underlying factors that determine the structure of the financial system of an economy - its mix of markets and financial institutions. (5 marks
A
- Underlying economy/economic structure
- Inflation
- Financing needs and domestic sources of supply/access to finance
- Bank and market efficiency
- Financial innovation - technology
- Regulation of financial institutions & securities markets
- Legal system (common law vs civil law or vs any law at all)
- Cultural context (eg Islamic banking)
- Protection of investors/depositors
3
Q
Describe Adam Smiths “invisible hand”. What does it do? (5 marks).
A
Market Force that helps the Supply & Demand in a free Market Reach Equilibrium. the invisible hand is based on everyone acting in self interest
4
Q
How do you judge the effectiveness of a financial system as a whole? (5 marks) (5 out of 7 possible answers needed)
A
- Sustainability
- Are Current and Capital accounts) maximizing economic growth and increasing net worth)
- Growth is sustainable, strong and stable – Output is maximized with min output gap.
- Low unemployment and inflation rate
- Scarce resources are efficiently allocated among -.National wealth – compare with other countries. Saving and education. Money earned from resources invest in education ( human capital )
- Balance of payments : current account ( X/M) & capital account ( debt and equity in or out of the country )
