Financial System Essay

Words: 1282
Pages: 6
Open Document
1. Question 1: “The role of the financial system in a market economy is to effectively and efficiently move funds from surplus budget units to deficit budget units.” However, in the absence of well-functioning financial intermediaries this transfer of funds may be severely retarded.” Discuss.
Within a financial system, surplus and deficit units trade, which facilitates the movement of funds from deficit units to have access to those with the budgeted units. Hence, there is always the incentive to trade. The role of the financial system is also to allow the deferral of expenditure. The question is often asked, how can this exchange of funds take place, one may think of it as a do it yourself project, like selling your house, without a …show more content…
Financial intermediaries reduce these transaction costs for individual borrowers and lenders because they are large highly specialized organizations with substantial capital and are therefore able to take advantage of economies of scale and scope (basically they can cover a large base with their funds). For example an individual drafting a legal contract for the provision of funds to another will incur substantial costs which will only be spread over the one investment. By specializing in lending arrangements a depository institution may be able to spread these costs over numerous transactions reducing the unit costs of the legal fees. Moreover they will be able to create unique investment and lending products which the individual may not be able to.

3) Information Asymmetry
– Information asymmetry exists in a situation where one party in a transaction has more information than the other party. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party’s lack of knowledge. In a direct finance scenario a potential borrower may have poor credit or may not be able to repay borrowed funds. Disclosing this information may reduce his chance of acquiring a loan and he may choose not to do so, creating a high risk of default for
Show More

Related Documents: Financial System Essay

Notes On The Financial System

Slide 2- The Financial System-The group of institutions that help match the saving of one person with the investment of another. Financial Markers-Institutions through which savers can directly provide funds to borrowers. A Bond Is….A certificate of indebtedness. A Stock Is….A claim to partial ownership in a firm Slide 3- Financial Intermediaries-Institutions through which savers can indirectly provide funds to borrowers. Example; Banks Mutual Funds-Institutions that sell shares to the public…

Words 319 - Pages 2

Economics Of The Financial System

Economics of the Financial System Show how transactions in derivatives can be used to either hedge risk or to open speculative positions. Derivatives have become popular in response to the increasing volatility and complexity of financial markets. A diverse range of new financial products have been created to enable market participants to handle the risks arising from trade in securities and to speculate on future expected movements in securities prices, without direct trade in the assets themselves…

Words 2776 - Pages 12

Overview Of The Financial System

Overview of the Financial System Chapter Preview • Suppose you want to start a business manufacturing a household cleaning robot, but you have no funds. • At the same time, Walter has money he wishes to invest for his retirement. • If the two of you could get together, perhaps both of your needs can be met. But how does that happen? Copyright © 2009 Pearson Prentice Hall. All rights reserved. 2-2 Chapter Preview • As simple as this example is, it highlights the importance of financial markets and…

Words 3276 - Pages 14

Complexities Of The US Financial System

Complexities of the U.S. Financial System Mark Lodge Strayer University November 5, 2014 Intro To Finance Prof. Escobedo We are going to discuss the complexities of the U.S. financial system in today’s economy. We will also discuss the impact the financial markets have, not just on the economy, but on businesses as well, also touching on the influence of interest rates on U.S. and global financial environment and give a few examples of such influences. U.S. Financial Markets impact on the…

Words 628 - Pages 3

Complexities Of The US Financial System

Complexities of the U.S. Financial System Mark Lodge Strayer University November 5, 2014 Intro To Finance Prof. Escobedo We are going to discuss the complexities of the U.S. financial system in today’s economy. We will also discuss the impact the financial markets have, not just on the economy, but on businesses as well, also touching on the influence of interest rates on U.S. and global financial environment and give a few examples of such influences. U.S. Financial Markets impact on the…

Words 625 - Pages 3

The Complexities Of The US Financial System

The Complexities of the U.S. Financial System SFC Carlton Hunter Professor Ahmad Rawish Principles of Finance 04 November 2014 The Complexities of the U.S. Financial System As the world continues to evolve, it is becoming clearer and extremely harder to deny that the United States economy plays a vital in the everyday lives all American people, but other nations around the world. The financial market impact the U.S. economy with its ability to raise capital, this happens through the…

Words 1027 - Pages 5

Notes On Financial Systems And Auditing

|3052 | |UNIT TITLE |Unit 11: Financial Systems and Auditing | |ASSIGNMENT TITLE |Accounting and Management Control Systems | |ASSIGNMENT NO |1 of 2…

Words 6680 - Pages 27

Essay about The Financial System

ECO 306 Short Paper # 1 – The Financial System Over the course of our adult lives most of us constantly need to buy products and services to support our daily needs. We buy food, electricity, gas, appliances, cars, houses, pay for phone and cable services, for piano lessons, haircuts, house repairs and many more. The constant money outflow is supported by cash inflows from paychecks, investments, and other sources of income. Unfortunately, while in the last couple of years economy is slowly improving…

Words 364 - Pages 2

Regulatory Framework of Financial System Essay

that banks will continue to fail even in the presence of supervision clearly articulating what constitutes supervision and regulation for the financial system as well as the rationale for regulating the financial system. __________________________________________________________________________ What constitutes supervision and regulation for the financial system? Banking supervision and regulation provides a forum for regular cooperation on banking supervisory matters; its objective is to enhance…

Words 3660 - Pages 15

Essay about Financial System and Auditing

Tesco…………………………………………………………………….. Effectiveness of Accounting System at Tesco ………………………………………….. The main financial statements of Tesco. ………………………………………………... Financial statement……………………………………………………………….. Benefits of the financial statements……………………………………………… Income statement ………………………………………………………………… Benefits of the income statement………………………………………………… Cash Flow statements……………………………………………………………. Benefits of the financial statement………………………………………………. Accounting concepts…………………………………………………………………………

Words 6188 - Pages 25