Macro economics 5.2 The financial sector Flashcards
What is the role of the financial sector?
Facilitates savings and investment, promotes economic development.
How do savings and investment promote economic development?
They provide the necessary capital for growth and expansion.
What is the Harrod-Domar model?
A model emphasizing the role of investment and savings in economic growth.
What is microfinance?
Small loans for projects at reasonable interest rates, aiding startups and individuals.
Evaluate the role of the financial sector in promoting economic development.
It supports capital formation, resource allocation, and risk management.
What is the role of the money market?
Facilitates short-term borrowing and lending of funds.
What is the role of the capital market?
Long-term funding through the buying and selling of securities.
What is the difference between the primary and secondary capital markets?
Primary market issues new securities; secondary market trades existing ones.
What is the difference between the spot and forward foreign exchange markets?
Spot market transactions occur immediately; forward market involves contracts for future delivery.
What are the main functions of the financial sector?
- Mobilising savings
- Allocating resources
- Providing payment systems
- Managing risk
Why might the financial sector in developing economies not be a secure foundation for economic growth?
Limited access to capital, underdeveloped infrastructure, and lack of investor confidence.
Why do the poorest countries struggle to develop?
Factors include lack of resources, poor governance, and insufficient infrastructure.
What does the Harrod-Domar model suggest about savings and investment?
They are essential for achieving economic growth.
What is a foreign exchange gap?
A situation where a country lacks enough foreign exchange to import necessary resources.
What is capital flight?
When investors move their capital to more profitable assets abroad.
How can the Harrod-Domar model use capital from abroad?
By attracting foreign investment to stabilise the financial sector and stimulate growth.
What are some advantages of Foreign Direct Investment (FDI) from MNCs?
- Job creation
- Technology transfer
- Infrastructure development
What are some disadvantages of borrowing?
- Debt accumulation
- Interest payments
- Financial instability
What is the role of microfinance in developing economies?
Provides small loans to promote entrepreneurship and income generation.
Who started the Grameen Bank and won the Nobel Prize in 2006?
Muhammad Yunus.
How does microfinance help protect businesses against climate change?
By allowing businesses to insure their operations.
What contrasting economic experiences are noted between Asia and sub-Saharan Africa?
Asia experienced post-war growth; sub-Saharan Africa faced slower development.
Explain why microfinance might be needed in developing countries.
It provides essential funding for small projects that increase productivity.
Evaluate whether developed financial systems are the key to economic growth in developing countries.
Yes, but other factors like human capital and rule of law are also important.
