Financial Sector

Question 1

What is a financial market?

Answer 1

• Capital Markets –> trade financial securities e.g. stocks and bonds
• Money Markets –> Shot-term loans e.g. treasury bills
• Derivatives Markets –> ??
• Foreign Exchange Market –> currencies traded

Question 2

What are the 5 roles of the financial market?

Answer 2

• Facilitate saving
• Lend to business + Individuals
• Facilitate Exchange of goods + services
• Provide forward markets in commodities + contract –> set future prices e.g. speculation
• Provide market for equities e.g. stock trading

Question 3

What are 5 Market Failures in the Financial Sector?

Answer 3

• Asymmetric information
  –> one party have less info in transaction, e.g. stock market limited info about productivity / profitability of companies
• Moral Hazard
  –> people lack incentive to guard against financial risk due to protection from consequences e.g. pre-2008 banks though gov would bail them out
• Speculation / Market bubbles
  –> assets traded at price higher than value, followed by crash when prices fall
• Externalities
• Market rigging
  pg 230

Question 4

What is the role of the Central Bank?

Answer 4

• Implement monetary policy
  –> interest rates and Quantitative easing
• Banker to gov.
  –> manages Gov accounts + gives loans - not any more? whats point of being in book then??
• Banker to banks
  –> offer loans to financial institutions with financial difficulties
  –> maintain stability of banking + financial system