Why Study Them?

Question 1

Distinguish economies having well-functioning financial markets with those having poorly performing ones.

Answer 1

The former will likely have high economic growth, while the latter will remain poor.

Question 2

Distinguish small businesses in economies where developed financial markets and institutions are less developed from those large businesses in economies that have well-developed financial markets and institutions

Answer 2

The former use direct funds transfers while in the latter, businesses find it more efficient to enlist the services of a financial institution.

Question 3

What makes financial markets work?

Answer 3

Financial institutions

Question 4

Briefly define financial institutions.

Answer 4

They are financial intermediaries that acquire funds by issuing liabilities and in turn use those funds to acquire assets by purchasing securities or making a loan.

Question 5

Enumerate some benefits of financial institutions.

Answer 5

1. Reduce transaction cost
2. Allow sharing
3. Solve problems created by adverse relation (adverse selection?) and moral hazard

Question 6

How would financial institutions make financial markets work?

Answer 6

They help move the flow of funds from those that save money to those with productive investment opportunities.

Question 7

Provide three examples of financial markets in the chapter.

Answer 7

1. Markets for bonds
2. Markets for stocks
3. Markets for foreign currency exchange

Question 8

Summarize the whole chapter.

Answer 8

Economists and policy-makers are concerned with the financial institutions’ vulnerability to risks, as they have a vital role in the financial system. Financial markets and institutions have massive influence on the world, considering all the possible functions they can do, from transfer of funds to enriching economies. (risk, role, influence)

The public’s view on financial markets is skewed, so the book tries to discuss it and clarify it. They first started from the first time mankind traded with each other and started agriculture. (view, evolution)

There is a glaring difference between well-developed financial markets and institutions from those that are poorly developed. The dependence of financial institutions is inherent in financial markets, as they make financial markets work. (distinction of development, dependence)

Studying financial markets and benefits clearly has benefits, from knowing how they can benefit the financial system, to the personal benefits in terms of career choice and how it helps learners interact with financial institutions in the future. (study benefits: benefits to financial system, career choice, and guide to interaction)