Macroeconomics Written Assignment 3

Written Assignment 3

What is the role of the financial system? Name and describe two markets that are part of the financial system in the U.S. economy. Name and describe two financial intermediaries.

The primary role of the financial system is to link the present with the future. Two markets, lenders and borrowers supply funds. Lenders give funds to consumers now as a way to invest their current income into future purchasing power. Borrowers demand loanable funds now, as a way to invest money today in order to gain further capital in the future. Examples of financial intermediaries include banks, mutual funds, and other financial institutions that provide financial services and asset management.

What is the government budget deficit? How does it affect interest rates, investment, and economic growth?

The government budget deficit is the result of our government spending more money than it receives through tax revenue, which lowers national saving. When the government borrows more money to finance its deficit, it also reduces loanable funds available for investment opportunities and economic growth, also known as crowding out, which raises the equilibrium interest rate.

What benefit do people get from the market for insurance? What two problems impede the insurance market from working perfectly?

The benefit people get from insurance is peace-of-mind coverage as long as premiums are met, and the ability to spread the risk involved amongst the thousands of insurance-company shareholders, rather than the cost and burden falling squarely on one person.

Two problems are adverse selection and moral hazard. Adverse selection is a high-risk individual who is more likely to apply for insurance and submit claims. Moral hazard is individuals who become less responsible, or more careless because there is less incentive due to insurance coverage.

Describe the efficient markets hypothesis and give a piece of evidence consistent with this hypothesis....