Money and Banking Exam Set with Verified Questions and Answers

Money and Banking Exam Set with Verified Questions and Answers The function of financial markets is to channel funds between market participants via trading of financial instruments, and to determine the equilibrium prices of the instruments. Such reallocation of funds can lead to better use of resources, such as more efficient investment and production, and better timing in consumption purchase, which all serve to increase the economic wellbeing of the society. A potential problem is mispricing of financial instruments, e.g., asset-pricing bubbles. The burst of bubbles may result in financial crises and recessions, which can damage the economy. -Describe the function of financial markets and explain why such function is important to economic activity. What is a potential problem in the pricing of financial instruments?