4.4 The Finanical Sector

Question 1

What do financial markets do?

Answer 1

1. Facilitate saving
2. Lend to businesses and individuals
3. They facilitate the exchange of goods & services
4. Provide a market for equities

Question 2

What is Asymmetric information?

Answer 2

When one party in a transaction has more information than the other resulting in inefficiency market outcomes

Question 3

What is moral hazard?

Answer 3

When an economic agent has an incentive to increase risks because if they fail someone else will face the consequences

Question 4

What are market bubbles?

Answer 4

Occurs when prices for a stock or asset rise exponentially over a period of time

Question 5

What are the key functions of central banks?

Answer 5

• Lender of last resort
• Governments bank
• Regulate the banking industry
• Monetary policy