Macroeconomics - Financial sector

Question 1

Functions of Financial markets - Facilitate x2

Answer 1

Facilitate saving (ensure security of deposited accounts and often pay interest to encourage saving), facilitate exchange of G&S (provide wide range of payment and transaction services (online payment systems, debit and credit card))

Question 2

Functions of Financial markets - x3

Answer 2

Lend to business and individuals (intermediary between savers and borrowers, providing credit for things such as funding business expansion or financing home purchases), provide forward markets in currencies and commodities (provide mechanism for parties to lock in future price, reduce uncertainty and risks)

Question 3

Market failure in the financial sector

Answer 3

Asymmetric info. (regulators may have insufficient info. relative to bankers to ensure stability of banking system), externalities (decisions by financial sector can cause external costs, e.g. using tax money to bail out banks), moral hazard, speculation and market bubbles

Question 4

Role of central banks

Answer 4

Implement monetary policy (control interest rates to keep inflation at target of 2% (+/-)), banker to the gov. (handling gov. department accounts), banker to banks (lender of last resort), role in regulation of banking industry (e.g. increase reserve requirements)