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What are the six parts of the financial system ? What is the role of the financial system in economy

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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Discussion #3

The role of governments in the economy is one of the most debated issues in economics. Similarly, one of the most enduring debates of U.S. economic history focuses on the role of government in the economy. On the one hand, it is argued that government regulation of the economy is too little and too late. On the other hand, there is also a claim that the U.S. economy is no longer a free market due to too many regulations.

Moreover, the causes of economic and financial crises have been parts of the larger debate on the role of the government in the economy. Some argue that the accumulation of incorrect policies and lack of effective policies led to the recent and other economic and financial turmoil (crises). Accordingly, the failures of the main entities that manage our economy, which are the Congress, the executive branch of the Federal government represented by the Treasury Department, and the Federal Reserve System, lead to economic and financial crises. The other side claims that it

explain the role of the major nondepository financial institutions in the financial system.

part 1

1. Why are bond markets important?

2. Why are stock markets important?

3. Why are banks important?

4. What aspects of the economy are affected by the money supply?

5. What are the four phases of a business cycle? How does money supply affect business

cycles?

6. What is the relationship between money supply growth and inflation?

7. What is monetary policy? What is fiscal policy?

8. What is the foreign exchange market?

9. How does an appreciation of a currency affect the economy?

10. How does a depreciation of a currency affect an economy?

part 2

1. What are the two components of a financial system? What is direct finance? Indirect

finance?

2. What is the role of financial markets?

3. Explain the following classifications of financial markets

a. Debt and. equity markets

b. Primary and secondary markets

c. Exchanges and over-the-counter markets

d. Money and capital markets

4. List and briefly explain each money market instrument.

5. List the capital market instruments.

6. Explain why financial intermediaries play an important role in the economy (address the

following: transactions costs, risk sharing, information costs, and economies of scope).

7. What is asymmetric information? What are the two problems that arise when there is

asymmetric information in the financial system?

8. Explain the adverse selection and moral hazard problems that are a result of asymmetric

information.

9. What are the different types of financial intermediaries in the U.S. economy?

10. Which financial intermediaries are classified as depository institutions (or banks)?

11. What are the two main reasons why the government regulates the financial system?

12. What are the different types of financial regulations implemented by the government in

the U.S.?


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