4.4 The Financial Sector Flashcards
(18 cards)
What are financial markets?
Financial markets are platforms where financial liquid assets are exchanged, such as the stock market and the bond market.
What is the role of financial markets in saving?
Financial markets provide a place for consumers and firms to store their funds, rewarding savings with interest payments from banks.
How do financial markets facilitate lending?
Financial markets aid the transfer of funds between agents, which can be used for investment or consumption.
What is the role of financial markets in exchanging goods and services?
Financial markets facilitate the transfer of real economic resources, making it easier for buyers and sellers to interact and transfer funds.
What are forward markets?
Forward markets are informal financial markets where contracts for future delivery of currencies and commodities are made.
What is an equity market?
Equity markets, also known as stock markets, involve the trade of shares, providing access to capital for firms and allowing investors to own part of a market.
What is market failure in the financial sector?
Market failure in the financial sector was evident during the Great Recession of 2008, characterized by asymmetric information and risky loans.
What is asymmetric information?
Asymmetric information occurs when one party in a transaction has more or better information than the other, leading to risky loans and mortgages.
What are externalities?
Externalities are effects from an economic transaction on a third party not directly involved, which can lead to inefficient market allocations.
What is a pecuniary externality?
A pecuniary externality leads to inefficient allocation in the market through prices rather than resources, such as under provision of liquidity.
What is a moral hazard?
A moral hazard is a situation where a borrower takes risks that the lender would not deem desirable, often due to insurance or safety nets.
What is speculation and market bubbles?
A market bubble occurs when asset prices rise significantly beyond intrinsic value, leading to a sudden fall in prices and potential economic decline.
What is market rigging?
Market rigging involves firms colluding to interfere in a market to gain an unfair advantage, exemplified by the Libor Scandal.
What is the role of central banks?
Central banks manage currency, money supply, and interest rates in an economy, such as the European Central Bank and the Bank of England.
What is the implementation of monetary policy?
Central banks influence interest rates, money supply, and credit to achieve economic goals, with the Monetary Policy Committee in the UK altering interest rates.
What is the role of central banks as bankers to the government?
Central banks provide services to the government, including collecting payments, managing public debt, and advising on finance.
What does it mean for a central bank to be a lender of last resort?
A lender of last resort is a central bank that provides liquidity to banks in distress to prevent financial collapse and protect depositors.
What is the role of central banks in regulating the banking industry?
Central banks regulate banks to ensure clear behavior and protect consumer interests, with the UK banking industry regulated by the PRA and FCA.
