paper 1 final

Question 1

5 functions of finance (films)

Answer 1

forward markets
insurance
lending
market for equities
saving

Question 2

problems with financial markets (maman)

Answer 2

moral hazard
asset bubbles
market rigging (collusion)
asymmetric information
negative externalities

Question 3

how does speculation affect exchange rates

Answer 3

if believed that pound will fall, sell pounds

as supply of pounds goes up, value does indeed fall

Question 4

how does economic growth affect exchange rates

Answer 4

pound goes up because markets expect interest rates to rise (and then hot money is in play)

Question 5

three ways of regulating the financial system

Answer 5

1. setting a liquidity ratio (ratio of short term assets that can be used to pay SR debt)
2. risk management e.g. PRA
3. transparency

Question 6

three ways of regulating the financial system

Answer 6

1. setting a liquidity ratio (ratio of short term assets that can be used to pay SR debt)
2. risk management e.g. PRA
3. transparency

Question 7

Unemployment trap

Answer 7

occurs when an individual is little better off getting a job than staying unemployed, and is a major disincentive to find work

Question 8

Earning trap

Answer 8

Earning trap occurs when a low income working individual or household earns more
but the net gain is little or negative
(bc of taxes)

Question 9

problem with deregulation?

Answer 9

‘creaming’ of markets –>firms only provide services in most profitable areas of the market