Role Of Fiancial Markets

Question 1

What are the roles of financial markets

Answer 1

• facilitate savings - allow people to transfer spending from the present to the future
• lend to businesses and individuals - allow for consumption
• facilitate the exchange of goods and services - provide methods of payment such as print money, companies offer credit cards
• provide forward markets - allow people to buy and sell at a set price in the future farmer and stability
• proivde a market for equities -> allows shares to be sold on in the future

Question 2

What are the causes of failure in a financial market

Answer 2

• asymmetric information
• moral hazards
• speculation and amrket bubbles
• market rigging

Question 3

What is asymmetrical information and hwo does it cause amrket failure

Answer 3

• Asymmetric information is when financial institutions tend to have greater information than their customers
• means they will sell financial products at higher prices compared to elsewhere, that people do not need or are risky

Question 4

What is an example of asymmetric information

Answer 4

• in the financial crisis of 2008 bankers sold subprime mortgages as prime mortgages

Question 5

What is a moral hazard

Answer 5

• a moral hazard is when an individual makes a decision in their best interests which holds a risk that they will not be liable for
• for example, workers of a company take a risk in order to increase their salaries but it is the company who will face probelms of this risk not the individual

Question 6

What’s an example of a moral hazard

Answer 6

• in the financial crisis, workers sold mortgages to people they knew couldn’t pay back the mortgage in order to increase Their salaries

Question 7

How does the central bank a cause of a moral hazard

Answer 7

The central bank is lender of last resort so financial institutions cannot fail

Question 8

What are amrket bubbles caused by

Answer 8

Speculation

Question 9

How does speculation lead to market bubbles

Answer 9

• people be,elev the price of an asset to rise in the future which will make them profits and then due to this prices get excessively high however prices aren’t high enough so buyers get impatient and sell excessively (mass selling) which causes the price to fall

Question 10

How has the financial markets caused a market bubble in the housing market

Answer 10

• giving out too many mortgages which lead demand for houses to increase, when this bubble bursts, the price will fall causing a negative wealth effect leaving the bank left with loans they cannot be repay

Question 11

What is market rigging

Answer 11

Market rising is when individuals or institutions fix prices or exchange information whuch will lead to gains

Question 12

What is an example of amrket rigging

Answer 12

Insider trading when someone has information about something which woll occur in the future which makes them buy or sell shares to be profitable