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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

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

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

5 forms of market failure in the financial sector

-Speculative bubbles


-asymmetric information


-moral hazard


-externalities


-market rigging

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

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

Moral hazard

Banks take higher risks because they know that the Bank of England will bear the risk if they collapse

What negative externalities are there in the financial industry

Banks risky decisions caused increased unemployment, decreased gdp etc

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

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