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Questions and Answers
What is the main task of the financial system in the process of production and distribution?
What is the primary function of the financial system?
What are the two main segments of the financial system?
What is the main objective of financial institutions?
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What type of intermediaries redistribute financial instruments?
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What is the role of central banks?
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What are the four parts of a market financial system?
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What is the purpose of fiscal instruments?
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What type of financial institution issues money?
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What is the main purpose of public financial instruments?
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Study Notes
Financial System
- A system of interconnected rules and institutions that enables cash flows between different entities using money.
- Provides services to the real sector, aiming to decrease transaction costs in production and distribution.
Characteristics of the Financial Sector
- Growing in contribution to GDP
- Becoming more complicated and risk management-oriented
- More competitive, global, and value-oriented
- Increasingly important in corporate and personal decision-making
- Financial prices and architecture are becoming more crucial for the economy
Primary Function of the Financial System
- Facilitate the allocation and deployment of economic resources in time and space, in an uncertain environment
- Allocate capital and risk efficiently
Functions of the Financial System
- Clearing and settling payments
- Pooling resources and subdividing shares
- Transferring resources across time and space
- Managing risk
- Providing information
- Dealing with incentive problems
Segments of the Financial System
- Market financial system: services to the real sector are provided by market mechanisms
- Public financial system: services to the real sector are provided by public (state) decisions, providing public goods and social services
Market Financial System
- Four parts: financial instruments, financial markets, financial institutions, and rules connecting them
- Financial instruments: contracts between parties regulating financial relationships
- Financial markets: markets where transactions related to financial instruments take place
- Financial institutions: firms whose main objective is trading financial instruments, with main assets being financial instruments
- Rules: formal (legal) and non-formal
Financial Institutions
- Main types: passive and active intermediaries
- Passive intermediaries: redistribute financial instruments (e.g., brokerage houses)
- Active intermediaries: create financial instruments (e.g., insurance companies, investment funds, pension funds, commercial banks, investment banks)
- Active intermediaries: create money (e.g., central bank, commercial banks)
Public Financial System
- Four parts: budgetary legal rules, fiscal instruments, public financial instruments, and fiscal institutions
- Budgetary legal rules: rules for creating and implementing public budgets
- Fiscal instruments: mechanisms for acquiring and distributing public funds
- Public financial instruments: financial instruments issued to cover public fund deficits
- Fiscal institutions: support the operation of the public financial system
Public Budgets
- Three types: state budget, local budget, and special funds budget
- Composition of revenues and expenses of public sector institutions
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