Week 1: role of financial markets- direct and indirect finance

What is a financial market?

A market where financial assets are traded

What is one key role of financial markets?

They channel funds from surplus units to deficit units

Who are surplus units in financial markets?

Individuals or businesses with funds available for investment (lender-savers)

Who are deficit units in financial markets?

Individuals or businesses that need funds (borrower-spenders)

What do financial markets facilitate between lenders-savers and borrower-spenders?

The transfer of funds from surplus units to deficit units

How do financial markets affect economic efficiency?

They improve economic efficiency by di8recting funds to productive uses

What is another term for lender-savers?

Surplus units

What is another term for borrower-spenders?

Deficit units

Why are financial markets important to the economy?

They allocate capital efficiently and improve economic performance

How can financial markets improve economic efficiency?

By allowing funds to be transferred from savers to those who can use them productively

Why does the absence of financial markets reduce economic efficiency?

Productive investments may not occur because borrowers cannot access available savings

Why can both lenders and borrowers benefit from financial markets?

Lenders earn returns on savings while borrowers obtain funds for investment or consumption

How do financial markets support economic growth?

They help finance productive investments that increase output and income

How do financial markets benefit households?

They allow individuals to borrow for major purchases, such as housing, before accumulating sufficient savings

Why are financial markets important beyond business investment?

They allow households to smooth consumption and finance large purhcases

What is direct finance?

Borrowers obtain funds directly from lenders by selling financial instruments in financial markets

What is indirect finance?

Borrowers obtain funds from lenders through financial intermediaries such as banks

What is the key difference between direct and indirect finance?

Direct finance involves no intermediary, while indirect financ involves intermediary between savers and borrowers

What is financial intermediary?

An institution that channels funds from savers to borrowers

Give an example of indirect finance?

A household deposits money in a bank, and the bank lends it to a business

Who are the main lender-savers in financial markets?

Households, businesses, governments, and foreigners

Who are the main borrower-spenders in financial markets?

Businesses, governments, households, foreigners

Through what two channels can funds flow from savers to borrowers?

Direct finance and indirect finance

What is the role of financial markets in fund flows?

They facilitate the transfer of funds from lender-savers to borrower-spenders

What is the role of financial intermediaries in fund flows?

They collect funds from savers and lend them to borrowers