What are financial markets?
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What are financial markets?
Financial markets are any system or intermediary that provides buyers and sellers with the means to exchange goods and services and trade financial products.
What is a bond?
A bond is a financial instrument that provides a loan from an investor to a borrower.
What are equities?
Equities are shares in public companies that are listed on stock exchanges.
True or False?
Financial markets facilitate saving.
True.
Financial markets facilitate saving.
How do financial markets contribute to economic growth?
Financial markets contribute to economic growth by lending to businesses and individuals. They provide access to credit.
What is the purpose of a forward market?
A forward market provides some price stability in commodity markets. It enables investors to make financial gains by speculating on future prices.
What are derivatives?
Derivatives are financial instruments whose amount is determined by the value of underlying assets.
Which type of market allows for long-term investment and speculation in companies?
The market for equities allows for long-term investment and speculation in companies.
What is the role of financial markets in facilitating exchange?
Financial markets facilitate the exchange of goods and services by providing multiple ways for money to move between parties.
True or False?
Financial markets only deal with physical currencies.
False.
Financial markets deal with various financial instruments including digital transactions.
How do financial markets connect buyers and sellers of equities?
Financial markets connect buyers and sellers of equities by providing platforms such as E-Trade.
What is the relationship between saving and borrowing in financial markets?
In financial markets, one person's savings become another person's borrowing. This creates a pool of money for financial institutions to lend.
In financial markets, what does asymmetric information mean?
In financial markets, asymmetric information occurs because sellers have significantly superior knowledge than buyers.
Define moral hazard in the context of the financial sector.
Moral hazard in the financial sector is when banks take excessive risks because they believe they are too big to fail. They expect governments to bail them out when problems occur.
What are negative externalities in financial markets?
Negative externalities in financial markets are unintended negative consequences of financial activities that affect third parties.
True or False?
The global financial crisis of 2008 had no impact on developing countries.
False.
The global financial crisis of 2008 had significant negative impacts on developing countries, such as reduced spending on imports.
How can speculation contribute to market failure?
Speculation can contribute to market failure by creating market bubbles and artificially inflating prices.
What is meant by too big to fail in the financial sector?
Too big to fail in the financial sector means that some banks are considered so important that governments will rescue them to prevent economic collapse.
Define market rigging.
Market rigging is the fraudulent manipulation of financial markets such as insider trading or fixing interest rates.
What is the China Hustle?
The China Hustle refers to investment funds and stockbrokers promoting obscure Chinese companies with fake financial data to stimulate demand from investors.
True or False?
Asymmetric information only affects consumers in financial markets.
False.
Asymmetric information affects both consumers and regulators in financial markets.
How does property speculation create negative externalities?
Property speculation creates negative externalities by driving up prices. This creates a negative third party effect as it can prevent first time buyers from entering the market because property becomes unaffordable.
What is the relationship between money supply and speculation?
A higher money supply in an economy tends to lead to greater speculation and a greater potential for market bubbles.
How has quantitative easing (QE) since 2008 affected financial markets?
Quantitative easing since 2008 has increased the money supply. This has contributed to bubbles in markets such as property, cryptocurrency and shares.
What is the primary role of central banks?
The primary role of central banks is to maintain stability in the financial system.
Define the term lender of last resort.
'Lender of last resort' refers to the central bank's role of providing loans to commercial banks facing short-term liquidity issues.
What is monetary policy?
Monetary policy is used by a country's central bank to influence the money supply through interest rates and quantitative easing (QE) to achieve macroeconomic objectives.
True or False?
Central banks are responsible for setting the government's annual budget.
False.
Central banks manage tax receipts and payments but the government sets the annual budget in its fiscal policy.
How do central banks regulate the banking industry?
Central banks regulate the banking industry by implementing stress tests and measures such as required reserve ratios to manage the money supply and promote stability.
What is the purpose of required reserve ratios?
Required reserve ratios are used to maintain liquidity by maintaining the money supply. This promotes stability in the financial system.
Define the term banker to the government.
Banker to the government' refers to the central bank managing the government's finances. This includes its tax receipts and payments.
How does raising the required reserve ratio affect the money supply?
Raising the required reserve ratio decreases the money supply in the economy.
What is the relationship between central banks and commercial banks?
Central banks act as bankers to commercial banks. They provide loans when needed and regulate their activities.
True or False?
Central banks have no role in achieving a government's macroeconomic objectives.
False.
Central banks help government's meet macroeconomic objectives through their policy tools.
How do central banks contribute to economic growth?
Central banks contribute to economic growth by implementing effective monetary policy and maintaining financial stability.
What is the main reason for regulating commercial banks?
The main reason for regulating commercial banks is to reduce market failure. Consumers need protection because there is a high level of asymmetric information in financial markets.