A. 14-1What is financial markets? What function do they perform? How would an economy be worse off without them?
According to the text, “financial markets are various institutions and procedures that
facilitate transactions in all types of financial claims, aka securities” Therefore, a
financial market is not exactly a physical place like a bank or investment firm,
although it can be. And the financial claims or securities are not essentially a physical
thing you can hold in
your hand. The trading of securities can take place over the phone
or internet. The “financial markets exist in order to allocate the supply of savings in the
economy to the demanders of those savings”. The markets exist because there is a
supply and demand need in the economy. The supply is the need to invest money and the
demand is the need to borrow money. “The wealth of the economy would be less without
the financial markets.” In a sense, financial markets help control and stabilize the
country’s economy with the supply and demand of goods and services and exchange of
securities and investments. According to the Federal Reserve Bank of San Francisco,
financial markets play an important role in the accrual of capital and the production of
goods and services. FSRB states that “the price of credit and returns on investment
provide signals to producers and consumers—financial market participants. Those
signals help direct funds (from savers, mainly households and businesses) to the
consumers, businesses, governments, and investors that would like to borrow money by
connecting those who
value the funds most highly (i.e., are willing to pay
a higher price,
or interest rate), to willing lenders”. [ (Econ, 2005) ]
B. 14-3 Distinguish between the money and capital markets.
Money markets are part of the financial markets and deals with short-term investments.
The definition in the text states “the money market refers to all institutions and...
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