Week 1 - Financial Systems(correctly solved answers)

What the roles of the financial system? correct answers -To facilitate the flow of funds -To provide the mechanism to settle transactions -To generate and disseminate information -To provide the means to transfer and manage risk -To provide ways of dealing with incentive problems What does the financial system allow? correct answers The financial system (i.e., financial markets, institutions and money) allows the efficient allocation of funds throughout the economy. What is the flow of funds? correct answers The financial system allows the flow of funds from surplus spending units (SSUs) to deficit spending units (DSUs) in return for financial instruments. What are the economic units? correct answers -Households -Businesses -Governments What is a SSU and DSU? correct answers -A surplus unit is a unit whose income exceeds planned expenditure. -A deficit unit is a unit whose expenditure exceeds its receipts. What is efficient flow of funds? correct answers The efficient flow of funds through the economy from savers to investors & spenders creates wealth and provides information. What is allocational efficiency? correct answers -'funds are allocated to their highest-value use.' -Funds are allocated to projects with the highest risk-adjusted returns which promote economic growth. What is informational efficiency? correct answers -Ability to obtain accurate information -'where market prices reflect all relevant information about securities.' -Allows households & firms to make intelligent decisions. What is operational efficiency? correct answers -We want to transact at lowest cost -'where the costs of conducting transactions are as low as possible.' -Society is better off, economy grows, employment grows What is information asymmetry? correct answers When one party in a transaction has more information than the other party (eg. car seller knows more about the condition of the car than the buyer). What is adverse selection? correct answers A market process which produces a sub-optimal outcome due to parties having asymmetric information (eg. people with dangerous jobs or high risk lifestyles tend to purchase life insurance).