theme 4 financial markets

Question 1

main functions of financial market

Answer 1

• facilitate savings
• lend to businesses and individuals (C+I)
• facilitate exchange of goods and services
• provide forwards markets
• provide market for equities
• insurance

Question 2

what are forward markets

Answer 2

setting price of an asset for future delivery
allows speculation

Question 3

what are equity markets

Answer 3

allows shares to be sold in future for potential profits making them desirable
allows investors to own part of the market and earn return in form of dividends

Question 4

con of not stable financial markets

Answer 4

decreased confidence- decrease I, savings so less C, decrease AD
loss of trust- higher I.R and harder to access credit
higher inequality- poorer communities more vulnerable

Question 5

financial markets definition

Answer 5

where buyers and sellers come together to trade goods/ services/ assets to get a financial benefit

Question 6

reasons why financial markets fail

Answer 6

• asymmetric info
• moral hazard
• speculation and market bubble
• market rigging
• externalities

Question 7

asymmetric info in financial markets

Answer 7

financial institutions have more info than customers and use to their advantage

Question 8

moral hazard in financial markets

Answer 8

when economic agent makes a decision in their best interest knowing it may negatively affect other agents as they are their insurance/ protection

Question 9

speculation and market bubbles in financial markets

Answer 9

market bubbles happen when prices of a asset is driven to an excessive high and then collapses caused by herd behaviour
investors basing their actions on what others are doing

Question 10

market rigging in financial markets

Answer 10

individuals/ institutions collude to fix prices/ exchange info that will benefit themselves at the expense of others

Question 11

externalities in financial markets

Answer 11

effects of economic transactions on a 3rd party who wasnt involved in the transaction
taxpayer bailing out banks

Question 12

liquidity meaning

Answer 12

ease and cost with which assets can be turned into cash

Question 13

capital ratio meaning

Answer 13

measure of funds a commercial bank has in reserve against riskier assets that could be venerable in the event of a crisis

Question 14

leverage ratio meaning

Answer 14

indicator of the ability of a bank to absorb losses

Question 15

peer to peer lending meaning

Answer 15

when individual savers are able to lend directly from borrowers

Question 16

key characteristics of a crisis in the financial market

Answer 16

collapse of one financial market
run on banks
asset prices collapsing
uncertainty

Question 17

roles of the central bank

Answer 17

issuing notes and coins
monetary policy
exchange rates- gold and foreign currency reserves
banker to the gov
banker to banks- lender of last resort
regulation

Question 18

central banks not with gov

Answer 18

• less corruption, less political interference so more control over monetary policy

Question 19

central banks with gov

Answer 19

opp cost
less vulnerable to shocks
less disagreements so efficient
confidence