Financial System Overview

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Questions and Answers

What is the primary function of the financial system?

To facilitate the flow of funds from savers to borrowers (correct)

To promote international trade

To collect taxes for government spending

To regulate foreign investments

How do financial intermediaries contribute to the financial system?

By engaging exclusively in stock market trading

By managing government accounts and budgets

By borrowing funds from savers and lending them to borrowers (correct)

By setting high interest rates for all loans

Which of the following best illustrates a role of the financial system in economic activity?

Contributing to wealth redistribution

Setting currency exchange rates

Regulating monetary policy

Enhancing investment through credit availability (correct)

What happened to consumer credit availability between 2007 and 2009?

It became much more difficult to obtain Signup and view all the answers

What role does the central bank play in the financial system?

Stabilizing the financial system Signup and view all the answers

Why is the financial system critical to the functioning of a modern economy?

It facilitates movement of funds which promotes investment Signup and view all the answers

What constitutes the financial markets and financial intermediaries?

Channels for buying or selling securities and institutions that lend money Signup and view all the answers

What are financial securities?

Tradable financial assets bought and sold in financial markets Signup and view all the answers

What do shares of stock represent in a corporation like General Electric?

A partial ownership of the firm Signup and view all the answers

How do financial intermediaries typically generate profit?

By lending saved funds at higher interest rates Signup and view all the answers

What characterizes a bond issued by a corporation or government?

It functions as a direct loan to the issuer Signup and view all the answers

What typically happens to subprime borrowers in the context of traditional lending?

They are often excluded from obtaining loans Signup and view all the answers

What can be inferred about the trend of subprime lending as observed in the mid-2000s?

Many lenders experienced heavy losses due to defaults Signup and view all the answers

What is a feature of the financial security known as stocks?

They represent ownership and voting rights in a corporation Signup and view all the answers

What happens when financial intermediaries purchase portfolios of assets?

They consolidate savings from different sources for risk diversification Signup and view all the answers

As of mid-2012, which of the following financial products were being offered to subprime borrowers?

Prepaid debit cards and low-limit credit cards Signup and view all the answers

Study Notes

Financial System Role

The financial system is the mechanism through which funds flow from savers to borrowers, promoting investment and capital goods accumulation.
Households, firms, and governments all borrow funds for various purposes, encouraging economic activity when the system functions effectively.

Financial System Components

The financial system consists of financial markets and financial intermediaries.
Financial markets are platforms for buying and selling financial securities, such as stocks and bonds.
Financial intermediaries, like commercial banks, borrow funds from savers and lend them to borrowers.
Financial securities are tradable financial assets, representing ownership and value.

Stocks and Bonds

Corporations like General Electric (GE) issue stock representing partial ownership in the firm, with the right to share in profits.
GE also issues bonds to borrow funds, promising repayment at a future date with interest.
Bond borrowing occurs directly from lenders, unlike borrowing from financial intermediaries.
These financial assets are often traded in secondary markets.

Financial Intermediaries

Intermediaries operate by paying savers a lower interest rate than the rate they charge borrowers, earning a profit.
Many financial intermediaries use saved funds to buy portfolios of assets.

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Description

This quiz covers the fundamentals of the financial system, including its role, components, and the significance of stocks and bonds. Understand how funds flow from savers to borrowers and the impact of financial markets and intermediaries on economic activity.