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10 Cards in this Set
- Front
- Back
Financial markets |
Brings together sellers who want to save funds and buyers who want to borrow funds |
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Four functions of financial markets |
-facilitate borrowing, spending and investment -facilitate the exchange of goods and services -provide a futures/forward market in currencies and commodities |
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Futures market |
Financial instrument that is set today but the transaction will take place at a future date. This helps to reduce the risk of the price going to high (helps businesses) and the price going to low (helps farmers) as the price is set at a mid point |
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5 forms of market failure in the financial sector |
-Speculative bubbles -asymmetric information -moral hazard -externalities -market rigging |
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Speculative bubblw |
A spike in the value/price of an asset causes further rises in its price as people expect future growth so more people buy it which causes further price increases etc |
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How does asymmetric information in the context of financial markets work |
One party knows more than the other in a transaction eg someone lending money for a mortgage doesn’t truly know the likelihood of that person paying them back |
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Moral hazard |
Banks take higher risks because they know that the Bank of England will bear the risk if they collapse |
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What negative externalities are there in the financial industry |
Banks risky decisions caused increased unemployment, decreased gdp etc |
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Market rigging |
Were firms or individuals collude to gain an unfair advantage on the stocks market by setting the price at a level that benefits them |
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The three roles of a central bank |
-banker to the government -banker to the banks, lender of last resort -regulating the bank industry eg controlling suitability of products sold to consumers and ensuring banks have reserves of cash |