Economics Financial Markets

Essay by dallaclasHigh School, 11th grade November 2007

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Economics preliminary: Financial Markets•definition a financial market, in short is a market that deals with lending and borrowing money between those that have excess and want to invest, or those that need. The basic motivation for this market is (for borrowers) to increase capital, hence making a larger profit, and (for lenders) to make a profit through interest (as an investment).

•Explain the role of institutions in the operation of financial markets institutions such as banks and insurance companies are responsible for indirect money borrowing and selling. That implies that they act as a go between or intermediary for people who want to borrow and people who want to lend.

The opposite of an indirect flow of funds is direct funding where no intermediary is used, and borrowers and lenders interact directly with each other.

•Analyse the factors that influence the level of interest rates interest rates are controlled by the Reserve Bank and the Government.

Decisions made are influenced by the state of the economy (e.g. an economic downturn, an economic boom etc.)ASIC (Australian Securities and Investments Commission) are a part of the Australian Government that control regulation as well. Their main duty lies to the consumer, ensuring they are not ripped off by banks. They probably control interest rates on a smaller level, by keeping an eye on banks.

•Predict trends in interest rates in hypothetical situations for example: when there is an economic boom, employment is high, and people are spending a lot of money, in terms of the market, Supply is not able to keep up with demand (e.g. if everybody is buying a house, and land starts running out) so to decrease the demand for housing, the Reserve Bank starts enforcing higher interest rates. All banks are controlled by the decisions and interest...