Economics Unit 2: Finance and Economic Growth

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?

Money (C) Signup and view all the answers

What is the focus of the institutional approach?

Banking and stock market developments (D) Signup and view all the answers

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

Conflict between surplus-fund and deficit-fund agents (B) Signup and view all the answers

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

Facilitating resource allocation over space and time (D) 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?

Reduction of Information Costs (D) Signup and view all the answers

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

Liquidity risk (D) Signup and view all the answers

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

By providing demand deposits and short-term loans guaranteed by long-term deposits (C) Signup and view all the answers

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

The cost of projects (A) Signup and view all the answers

What encourages financial intermediaries to encourage entrepreneurs to avoid risks?

Value of debt claims used in financing the project falls as risk increases (D) Signup and view all the answers

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

Risk Reduction (A) Signup and view all the answers

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

'Liquidity risk' (B) Signup and view all the answers

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

'Information costs' (B) Signup and view all the answers

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

A legal system that protects investors and enforces contracts (A) Signup and view all the answers

What is the 'Agency' problem related to?

The conflict between shareholders and management (D) Signup and view all the answers

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

The violation of project terms by the financial investor (A) Signup and view all the answers

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

Financial crises experienced in the 1990s (B) Signup and view all the answers

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

Protecting investors and enforcing contracts (D) Signup and view all the answers

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

The conflict between shareholders and company management (A) Signup and view all the answers

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

High interest rates for project funding (C) Signup and view all the answers

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

Reputation of the borrower or project (A) Signup and view all the answers

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

Directed credit allocation and an interest rate ceiling (A) Signup and view all the answers

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

Capital-intensive investment (D) Signup and view all the answers

What is increased at the international level following financial liberalization?

Foreign exchange risk (D) Signup and view all the answers

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

Private capital flows generally (D) Signup and view all the answers

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

Inflation-push policies (A) Signup and view all the answers

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

Driving transactions into Curb markets (B) 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?

Discourages it by providing cheap finance for government budgets (C) Signup and view all the answers

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

Become involved in more risky projects (C) Signup and view all the answers