4.4 The financial sectoe Flashcards
(22 cards)
What are financial markets?
Places where buyers and sellers can buy and trade services or assets that are fundamentally monetary in nature.
What are the two main reasons for the existence of financial markets?
- To meet the demand for services such as saving and borrowing
- To allow speculation and financial gains.
How do financial markets facilitate savings?
They allow people to transfer their spending power from the present to the future through assets like savings accounts and stocks.
What role do financial markets play as financial intermediaries?
They lend to businesses and individuals, allowing for consumption and investment.
What is one way financial markets facilitate the exchange of goods and services?
By creating a payment system that includes services like credit cards and currency exchange.
What are forward markets?
Markets where firms can buy and sell assets at set prices in the future, providing stability.
Why are financial markets important for equity trading?
They provide a market for company shares, making it easier for companies to finance expansion.
What is market failure in the financial sector?
A situation where financial markets cause crises that significantly damage the real economy.
What is asymmetric information?
A situation where financial institutions have more knowledge than their customers, leading to potential exploitation.
What was a contributing factor to the Global Financial Crisis?
Banks selling packages of prime and subprime mortgages misrepresented as all prime mortgages due to asymmetric information.
What are externalities in the context of financial markets?
Costs imposed on firms, individuals, and the government that the financial market does not account for.
What is moral hazard?
When individuals make decisions in their own best interests, knowing that the negative consequences will not affect them.
How can moral hazard manifest in financial markets?
- Individuals taking excessive risks for higher salaries
- Financial institutions taking excessive risks due to the central bank being a lender of last resort.
What leads to speculation and market bubbles?
Speculative trading causes asset prices to rise excessively, leading to eventual panic selling.
What is herding behavior in financial markets?
When investors collectively sell their assets, causing a market crash due to panic.
What is market rigging?
Collusion by individuals or institutions to fix prices or exchange information for their benefit at the expense of others.
What is insider trading?
Buying or selling shares based on non-public information about future events.
What role does the central bank play in monetary policy?
Controls interest rates and money supply to keep inflation low and stable.
What services does a central bank provide to the government?
- Holds the government’s bank account
- Lends to the government
- Manages government debt.
What is the lender of last resort?
A function of the central bank to provide liquidity to banks experiencing financial difficulties.
What is one of the central banks’ roles in regulating the financial system?
Preventing financial institutions from undertaking harmful or risky activities.
What are some types of financial regulation?
- Banning market rigging
- Preventing the sale of unsuitable products
- Setting maximum interest rates
- Providing deposit insurance
- Imposing liquidity ratios.
