Financial Systems

Question 1

Financial assets vs. Non financial assets

Answer 1

Financial: piece of paper giving owner the right to future income from the seller

Non financial: the actual thing that can create income in the future, often but not always physical

Question 2

Liquidity

Answer 2

Ease at which something can be transformed to cash

Question 3

What first test financial system do?

Answer 3

Match savers w/ investors in physical assets (people w/ money w/ people who need it)

Reduce & Allocate risk (diversification): riskier investments = higher returns so don’t put all your eggs in one basket
Link b/w savings & investments
Provide & Allocate liquidity: although everyone wants liquidity the preferences of these vary & less liquid investments tend to have ahigher return

Question 4

What is the link between savings & investments?

Answer 4

Y= C+I+G