The Flow of Funds Function in Financial Systems

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What is the primary purpose of the financial system according to the passage?

To ensure that borrowers receive an attractive return on their investments

To facilitate the flow of funds between surplus and deficit units (correct)

To provide compensation to surplus units for forgoing the use of their funds

To allocate capital to the most productive uses

Which of the following is NOT mentioned in the passage as a type of deficit unit that requires funds?

Households

Businesses

Investors (correct)

The government

According to the passage, what is the primary factor that determines how the financial system allocates capital?

The returns paid by borrowers (correct)

The size of the surplus and deficit units

The efficiency of the financial markets

The risk posed to suppliers of funds

What is the main reason that surplus units provide funds according to the passage?

To earn a return on their investments Signup and view all the answers

Which of the following is NOT mentioned in the passage as a type of surplus unit that provides funds?

Venture capitalists Signup and view all the answers

According to the passage, what is the primary purpose of the financial system in allocating capital?

To channel funds to their most beneficial use Signup and view all the answers

What is the main function of a trading platform in the secondary market?

To organize the exchange of securities for payment Signup and view all the answers

In which type of secondary market would Investor A need to go directly to an individual dealer to get a quote?

OTC - Quote Driven Signup and view all the answers

What distinguishes trading arrangements organized by securities exchanges from OTC trading arrangements?

Trading between dealers instead of broker-client arrangements Signup and view all the answers

How does a quote driven market, like OTC, differ from an order driven market like Securities Exchanges?

In a quote driven market, the dealer gives a quote, while in an order driven market, the buyer sets the price. Signup and view all the answers

Why did trading shift from open outcry to computer-based systems in secondary markets?

To enhance efficiency and speed of trading Signup and view all the answers

Which type of market is predominantly for bonds and money markets and involves direct financing without orders?

Over the Counter (OTC) - Quote Driven Signup and view all the answers

What is the main characteristic of a price bubble according to the text?

Prices exceed fair values and are followed by a sharp correction Signup and view all the answers

What does the text suggest is a key driver of price bubbles?

Irrational exuberance and distorted expectations among traders Signup and view all the answers

What is the relationship between corporate profits and share prices during bull markets?

The increase in share prices is not fully explained by the growth in corporate profits Signup and view all the answers

What is the key difference between bull and bear markets according to the text?

Bull markets are characterized by rising prices, while bear markets are characterized by falling prices Signup and view all the answers

What is the text's implication about the efficiency of financial markets?

Financial markets are sometimes inefficient, as evidenced by price bubbles Signup and view all the answers

What is the main purpose of the pooling of funds mentioned in the text?

To overcome the incompatible wants of surplus and deficit units Signup and view all the answers

What is the role of central banks in promoting financial system stability according to the text?

Central banks act as the 'lender of last resort' to solvent but illiquid banks Signup and view all the answers

Which of the following is NOT mentioned in the text as a key aspect of financial system stability?

Ensuring the profitability of banks and other financial institutions Signup and view all the answers

Which type of financial institution is dominant in terms of total assets in Australia?

Pension/superannuation funds Signup and view all the answers

What is the main purpose of the international supervision guidelines mentioned in the text?

To establish consistent supervision arrangements across countries Signup and view all the answers

What is the primary responsibility of the Reserve Bank of Australia (RBA) according to the text?

To promote stability in Australia's financial system Signup and view all the answers

What is the primary purpose of financial systems mentioned in the text?

To provide access to accurate information and ensure fair and efficient decision-making for all parties. Signup and view all the answers

What is the main role of banks in the financial system?

Banks play a crucial role in pooling funds from individual suppliers and allocating them to different borrowers or investments. Signup and view all the answers

Which of the following is identified in the text as an important factor for increasing the efficiency and competitiveness of the financial system?

The emergence of new and reliable financial instruments, services, and operating systems. Signup and view all the answers

What is the key benefit of new technology mentioned in the text?

New technology provides new investment opportunities for organizations. Signup and view all the answers

Which of the following financial instruments is mentioned in the text as being less efficient and more prone to fraud compared to newer options?

Checks Signup and view all the answers

What is the main purpose of pooling funds from individual suppliers mentioned in the text?

To achieve economies of scale and efficiently allocate funds from surplus to deficit units. Signup and view all the answers