The Financial Sector

Question 1

The roles of the financial sector? (5)

Answer 1

1. Saving
2. Lending
3. Reducing risk
4. Forward market in commodities
5. Shares

Question 2

How does the financial market reduce risks?

Answer 2

Forward currency markets enable firms to buy foreign currency at a fixed price which gives firms more confidence to invest.

Question 3

Market failures in the financial sector? (5)

Answer 3

1. Asymmetric information
2. Moral hazard
3. Speculation and market bubbles
4. Market rigging
5. Externalities

Question 4

The functions for Central Banks? (5)

Answer 4

1. Monetary policy
2. Banker to the government
3. Lender of last resort
4. Printing money
5. Regulation of banking industry

Question 5

How does the central bank act as the lender of last resort?

Answer 5

If the government runs out of money the central bank buys their debt, preventing panic.