Financial sector

Question 1

What is the financial sector

Answer 1

Part of the overall economy made up of banks, money markets and brokers

Question 2

Savings v investment

Answer 2

savings is a leakage, investment is an injection. Therefore in theory, more savings harm economic growth, more investment increases it

Question 3

What is investment

Answer 3

the addition to the capital stock

Question 4

Where is there a negative correlation between savings an investment

Answer 4

higher interest rates attract savings but deter investment. Confidence increases investment, decrease savings.

Question 5

Where is there a positive correlation between savings and investment.

Answer 5

neoclassical economics: investment is determined by available savings in the economy. S=I

Question 6

Evaluate the role of the banking system in economic growth

Answer 6

Banking system is critical to economic growth, financial institution supports innovation and creativity, particularly for small business leading to future growth by identifying and funding productive investment. Facilitates creation of wealth, trade and formation of capital

Question 7

Evaluate the role of stock exchange for promoting economic growth

Answer 7

provides a platform for new and expanding business to gain funding, allowing to grow, make more profits hire more workers etc…

Question 8

Evaluate the role of money market in driving economic growth

Answer 8

contributes to economic stability and development of a country by providing short-term liquidity to governments, commercial banks and other large organizations. Investors with excess money that they do not need to invest it in the money market and earn interest.

Question 9

Why is the financial sector not efficient at creating growth

Answer 9

driven by its own interests, banks are reluctant to take risks and don’t do enough to support businesses, stock exchange is driven by short-term profits/dividends an is not interested in long term growth

Question 10

What other sectors may be more important at creating economic growth than the financial sector

Answer 10

government/public sector, primary/secondary business that create real wealth

Question 11

What does the efficiency of the financial sector at creating economic growth depend on

Answer 11

how well is the sector regulated?

Question 12

What is the harrod-domar model

Answer 12

importance of savings and investment as key determinants of growth

Question 13

According to the harrod-domar model what does the rate of growth depend on

Answer 13

level of national savings and the productivity of capital investments (capital-output ratio).

Question 14

Rate of growth of GDP formula

Answer 14

savings ratio/capital output ratio

Question 15

What does a high capital output ratio mean

Answer 15

needs a lot of capital for production, and it will not get as much value of output for the same amount of capital

Question 16

What does a low capital output ratio mean

Answer 16

lot of output from little capital

Question 17

How can rate of growth in an economy can be increased

Answer 17

increased level of savings in the economy, reducing the capital output ratio

Question 18

How can boosting investment generate economic growth

Answer 18

boosting investment generates economic growth leading to higher level of national income allowing more people to save which can lead to more investment, boosting economic growth

Question 19

Finance sector in emerging economies

Answer 19

as countries develop and wealth increases in terms of wages and corporate profits there is naturally an increasing demand for financial services.

Question 20

Finance sector in developing economies

Answer 20

have very limited access to financial services such as credit, savings and insurance. Banks often refuse to service poor households and microenterprises because of the high cost

Question 21

What is microfinance

Answer 21

describes schemes that provide finance for small scale projects in developing countries. Aims to increase access to finance in developing countries

Question 22

What does lack of access to banks in developing countries cause

Answer 22

Caused them to rely on informal money lenders who charge exorbitantly high interest rates

Question 23

How does microfinance work

Answer 23

loans are provided by banks without the need for collateral. However, borrowers were required to form themselves into group of 5 with joint responsibility for the repayments. This reduce the transaction cost to the bank of making and monitoring the loans. May be important to end absolute poverty

Question 24

What is the disadvantage to microfinance

Answer 24

interest rates are still high e.g. 20% because of expensive lending and administrative costs. Collective lending so only as strong as the weakest.

Question 25

What do MFIs offer

Answer 25

business loans, deposits, savings, pension and insurance products