financial sector

Question 1

financial markets definition

Answer 1

a market place where buyers and sellers trade financial products

Question 2

Roles of the financial markets

Answer 2

Savings (Harrod Domar)
Lending
Facilitating the exchange of goods and services
Providing forward markets
Providing markets for equities

Question 3

Forward markets

Answer 3

Sellers/Buyers may guarantee a price in the future
Reduce uncertainties and price fluctuations
Forwards can be bought and sold in diff currencies

Question 4

Equity markets

Answer 4

Provides access to finance for expansion, shareholders get dividends
Second hand shares sales makes ownership more liquid

Question 5

Types of Financial Market Failures

Answer 5

Asymmetric Info
Externalities
Moral Hazard
Speculation
Market Rigging

Question 6

Asymmetric Info

Answer 6

Occurs when one party has more knowledge - hence lack of rational decisions
EG. Borrowers knowing more about the ability to repay than lenders, PPI

Question 7

Externalities

Answer 7

Ripple effects of GDP, unemployment, house prices and high govt bailouts. Led to fiscal austerity

Question 8

Market Rigging

Answer 8

Two or more parties work together to manipulate the market eg manipulating interest rates

Question 9

Moral Hazard

Answer 9

When selfish actions have negative impacts on only others - “too big to fail”

Question 10

Expansionary monetary Policy

Answer 10

Reduce base interest rates -> increases money supply (QE) -> leads to currency depreciation (worsens TOT)
Leads to increased consumption, investment and improve trade performance

Question 11

Effects of lower interest rates

Answer 11

Hot money flows out -> exchange rate falls -> cheaper exports so more trade -> AD rises -> inflation
Borrowing is cheaper -> more firms borrow for investment -> investment rises -> AD rises
Falls in mortgage repayments -> Less spending on household debt -> higher consumption -> AD outwards

Question 12

Role of BoE

Answer 12

Banker to the government
Lender of last resort
Regulatory body - can ask banks to increase reserves, set borrowing limits, cap interest rates

Question 13

Should banks be bailed out?

Answer 13

Vital as they facilitate savings -> loss of savings means loss of confidence, wealth and consumption -> huge ripple effects for economy such as potential for fall in inflation/AD and even deflation
Potential to recoup investment - Lloyds shares made back every penny. Mitigates taxpayers cost.
BUT massive intergenerational equity issues as future generations must pay off via tax.
ALSO Moral hazard as banks keep acting recklessly as they know they will be bailed out