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Financial Markets and Institutions Workshop Notes
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- The University Of Manchester (UOM)
Complete and Correct Financial Markets and Institutions Workshop Notes and Answers
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Tuesday, 11 October 2016Financial Markets and Institutions - Workshops
Workshop 1 - The Financial System
Multiple choice questions:
Attempt all questions before the workshop, open book. Your tutor will give the
answers and lead the discussions in the workshops.
1. Which of the following are not main participants in financial market transactions?
(a) households
(b) financial institutions
(c) governments
(d) all of the above are main participants in financial market transactions
Notes: 5 main participants - primary lenders and ultimate borrowers, individuals and
organisations that need financial services, financial institutions, market organisers,
regulators
2. Financial markets
(a) facilitate the flow of funds from deficit to surplus units.
(b) facilitate the flow of funds from surplus to deficit units.
(c) are markets in which financial assets such as stocks and bonds can be bought
and sold.
(d) only answers b and c are correct.
Notes: Financial system has two main roles - intermediary between surplus and deficit
accounts (direct markets - stocks and bonds, financial intermediation - banks), and a
payment mechanism (cheques, online payment, etc.)
3. What is the main difficulty with barter economy?
(a) A household cannot consume more than what it earns.
(b) The mis-match of desired quantity between buyers and sellers
(c) Money does not exist
(d) Double coincidence of wants
Notes: Needs do not always match (type and quantity of goods to be trades will not
always be agreed on)
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4. What is (are) the primary role(s) of financial system?
(a) An intermediary between the surplus agents and deficits agents
(b) Transforming low risk claims to high risk claims
(c) Transforming short-term claims to long-term claims
(d) All of the above
Notes: Being an agent between the surplus agents and deficit agent is is the MOST
important aspect. Banks transform high risk into low risk and so all of the above cannot
be correct
5. What is not an ideal characteristic for a good that can be used as money?
(a) Homogeneity of quality.
(b) Easy to carry.
(c) Relatively scarce.
(d) Having shiny surface.
Notes: All goods should have homogenous quality so they hold the same value to be
used as money, should be portable, there should be a relative scarcity to give it value.
Should also be durable, and easy to divide into smaller amounts.
6. What is NOT one of the most important factors to judge the quality of a financial
centre?
(a) Infrastructure.
(b) Business environment.
(c) People.
(d) Diversity.
Notes: people and availability of skilled labour are very important.
7. Which of the following statement about monetary economy is incorrect?
(a) Broadly, there are two sectors in monetary economy: households and firms.
(b) Households provide labour and lands to firms.
(c) Firms are where productions are organised.
(d) Households sell products to firms.
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8. Which of the following statement is true about the economy with financial system?
(a) All participants are either ultimate fund users or ultimate fund providers.
(b) Households cannot spend more than what they have earned and saved.
(c) Firms cannot invest more than what they have earned and saved.
(d) Money is available in the economy.
Notes: There are many participants in the system, primary lenders and ultimate
borrowers are just some of them, households can take loans (e.g. credit cards,
overdrafts) and so they can spend more than they earn, firms can also take loans.
Short essay questions:
9. Discuss the role of money in the evolvement from barter economy to an advanced
economy with financial system.
Before money, the economy was structure around a system of bartering; exchange of a
given quantity of goods for a given quantity of a different good. However this was time
consuming, and there was the problem of double coincidence of wants; you would have
to find someone who is after the same trade as yourself. Furthermore you would both
have to agree on the trade, which was unlikely. - barter economy definition
Need to find a good as a widely recognised medium of exchange - money
Monetary economy
Main difficulty: households cannot consume more than their income, firms cannot invest
more than their income in a given time period
Financial system: facilitated funds from surplus to deficit agents.
The first instance of some form of money was ‘Asian Cutlery’. Sometime around 1,100
B.C., the Chinese moved from using actual tools and weapons as a medium of
exchange to using miniature replicas of the same tools cast in bronze. Nobody wants to
reach into their pocket and impale their hand on a sharp arrow so, over time, these tiny
daggers, spades and hoes were abandoned for the less prickly shape of a circle, which
became some of the first coins.
This was developed eventually, as the banks started using bank notes for depositors and
borrowers to carry around instead of coins. These notes could be taken to the bank at
any time and exchanged for their face values in silver or gold coins. This paper money
could be used to buy goods and operated much like currency today, but it was issued by
banks and private institutions, not the government, which is now responsible for issuing
currency in most countries.
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