Liam Rice

Chapter 1: (Questions): #1, #11

Chapter 2: (Questions): #3, #8

1. Why are financial markets important to the health of the economy?

Financials markets are the system that permits individuals to purchase and sell financial
securities like stocks and bonds. In a financial market the money is transmitted from and
individual who has surplus funds to the people who have deficiency. Financial markets
facilitate transferring funds from individual who don’t have a dynamic use of money to
individuals who need funds. A proper-operating market helps economic growth.
Financial market assists to expand and inspire the new thoughts of the beginners in the
business since business is the mainly useful means to grow the economy. In a healthy
economy, the allocation of funds is appropriate and there is large quantity of trade and
business. Financial markets transmit money from purchaser to vendor. Financial markets
support the growth of the economy.
11. What is the basic activity of banks?
A bank is a financial institution where individuals deposit their cash to maintain it safe.
The basic activity of banks is to collect deposits from the people and then exercises the
collected funds to make loans. Some of the features of banks are that they are financial
institutions that accept deposits, with the amount of deposits they make loans to
individuals and organizations. Commercial banks, savings banks, and credit unions are
included under the term bank, large proportion of wealth of a common Americans lie
with banks, individuals can obtain loan from banks for various purposes like buying a
house, car, etc.
11. Some economists suspect that one of the reasons that economies in developing countries
grow so slowly is that they do not have well-developed financial markets. Does this
argument make sense?
It is true that the financial market is a necessary boost for the expansion of the economic
activities. Due to the limited reach of the financial market a large section of the producer
have to depend on the intermediaries or the local money lenders for the necessary loans.
These intermediaries not only charge an exorbitant interest rate but also create debt
bondages and leads to interlinking market conditions which in turn distorts the product
market. In this way dominant, feudal and mercantile structure gains through the unequal
exchange via usury not via productive investment. Therefore, this kind of
underdeveloped financial market leads to slower growth of the economy.

8. Think of one example in which you have had to deal with the adverse selection
problem
In this case buying a second-hand text book on amazons used book market, I have to
deal with adverse selection problems. Since there was information asymmetry about
the used car since only the owners knows the true condition of the book. Therefore,
price adjustments happen accordingly and finally all the bad books remain on the
market. The, adverse selection occurs.