Economics Unit 2: Finance and Economic Growth
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Questions and Answers

What is the core function of the financial system according to the functional approach?

  • Reducing the conflict between surplus-fund and deficit-fund agents
  • Introducing money to facilitate barter exchange
  • Allocating resources over space and time (correct)
  • Facilitating specialisation and exchange

    • Which approach concerns the relationship between financial structure and provision of financial services?

  • The market-based approach
  • The instrumental approach
  • The functional approach (correct)
  • The institutional approach

    • What is the role of money in economic growth according to the instrumental approach?

  • Allocating resources over space and time
  • Resolving conflict between surplus-fund and deficit-fund agents (correct)
  • Providing financial security
  • Facilitating specialisation and exchange

    • What facilitates specialisation and exchange?

    <p>Money</p> Signup and view all the answers

    What is the focus of the institutional approach?

    <p>Banking and stock market developments</p> Signup and view all the answers

    What does the introduction of money resolve according to the text?

    <p>Conflict between surplus-fund and deficit-fund agents</p> Signup and view all the answers

    What is the primary function of the financial system according to the functional approach?

    <p>Facilitating resource allocation over space and time</p> Signup and view all the answers

    Which function of the financial system involves encouraging the emergence of the best entrepreneurs and promoting the best technological innovations?

    <p>Reduction of Information Costs</p> Signup and view all the answers

    What is the key uncertainty related to a future course of events called?

    <p>Liquidity risk</p> Signup and view all the answers

    How do capital markets help to overcome savers' reluctance to lose liquidity for a long time?

    <p>By providing demand deposits and short-term loans guaranteed by long-term deposits</p> Signup and view all the answers

    Which aspect discourages small investors from contributing to the production process within an economy?

    <p>The cost of projects</p> Signup and view all the answers

    What encourages financial intermediaries to encourage entrepreneurs to avoid risks?

    <p>Value of debt claims used in financing the project falls as risk increases</p> Signup and view all the answers

    What function is performed by financial institutions by transferring the ownership of the project to different shareholders?

    <p>Risk Reduction</p> Signup and view all the answers

    What is the uncertainty involved in converting assets into money known as?

    <p>'Liquidity risk'</p> Signup and view all the answers

    'Asymmetry of information' problem is related to the reduction of which costs?

    <p>'Information costs'</p> Signup and view all the answers

    What is the key determinant of the quality of the financial system, according to the legal-based approach?

    <p>A legal system that protects investors and enforces contracts</p> Signup and view all the answers

    What is the 'Agency' problem related to?

    <p>The conflict between shareholders and management</p> Signup and view all the answers

    What gives fund providers the right to appeal to the courts to enforce their rights?

    <p>The violation of project terms by the financial investor</p> Signup and view all the answers

    What stimulates research on the quality of financial services provided, according to the text?

    <p>Financial crises experienced in the 1990s</p> Signup and view all the answers

    What is the primary concern of the legal-based approach with regards to the financial system?

    <p>Protecting investors and enforcing contracts</p> Signup and view all the answers

    What does the 'Agency' problem in corporate governance refer to?

    <p>The conflict between shareholders and company management</p> Signup and view all the answers

    What can deter small investors from investing in a specific project according to the text?

    <p>High interest rates for project funding</p> Signup and view all the answers

    What is one fundamental explanation for investors providing funds when they are optimistic about the future of projects?

    <p>Reputation of the borrower or project</p> Signup and view all the answers

    What is likely to lead to weak portfolios in the banking system according to the text?

    <p>Directed credit allocation and an interest rate ceiling</p> Signup and view all the answers

    What do low nominal interest rates below the equilibrium market discourage according to the text?

    <p>Capital-intensive investment</p> Signup and view all the answers

    What is increased at the international level following financial liberalization?

    <p>Foreign exchange risk</p> Signup and view all the answers

    What is stimulated by a newly liberalized financial system following financial liberalization?

    <p>Private capital flows generally</p> Signup and view all the answers

    What is one feature of financial system distortion according to the text?

    <p>Inflation-push policies</p> Signup and view all the answers

    What is one impact of financial distortion in the financial market according to the text?

    <p>Driving transactions into Curb markets</p> Signup and view all the answers

    What does a high interest rate ceiling do to the discount factor in many LDCs, according to the text?

    <p>Discourages it by providing cheap finance for government budgets</p> Signup and view all the answers

    What does financial liberalization incentivize firms to do, according to the text?

    <p>Become involved in more risky projects</p> Signup and view all the answers

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