4.1 Role of Financial Markets

Question 1

Key roles?

Answer 1

1) Facilitate saving
2) Lend to businesses + individuals
3) Provide payment methods for exchanges

Question 2

What is a financial market?

Answer 2

Any exchange that facilitates the trading of financial instruments

Question 3

Characteristics of money?

Answer 3

1) Divisible
2) Easily transportable
3) Hard to counterfeit

Question 4

Functions of money?

Answer 4

1) Medium of exchange
2) Unit of account
3) Store of value

Question 5

What are the main functions of a commercial bank?

Answer 5

1) Provide retail banking services
2) Licensed to lend money
3) Licensed deposit-takers

Question 6

How can banks fail?

Answer 6

1) Credit crunch
2) Liquidity Trap
3) Run on the bank

Question 7

What are investment banks?

Answer 7

A bank that provides specialised services for companies + investors

Question 8

Possible drawbacks of financial sector involvement?

Answer 8

1) Risk of corruption
2) Risk of market failure
3) Need clear rule of law
4) Need financial literacy