Q & S

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1. Why is it important for us to understand how the global financial system works?
It is important to understand how the global financial system works, especially the money and capital
markets, because they are crucial to the functioning of the economy and affect our daily lives in many
ways. Here are some reasons why:
a) Investment opportunities: Understanding how the financial system works can help individuals and
businesses make informed decisions when it comes to investing their money in the money and
capital markets. This can help them maximize their returns and manage risk effectively.
Economic stability: The financial system plays a vital role in promoting economic stability.
Understanding how the financial system works can help policymakers and regulators to develop
policies that promote financial stability, prevent financial crises, and mitigate their impact when
they do occur.
b) Access to credit: The money and capital markets are critical sources of funding for businesses,
governments, and individuals. Understanding how these markets work can help borrowers access
credit at competitive rates and make informed decisions about how much debt to take on.
c) Interest rates: Interest rates in the money and capital markets have a significant impact on the
broader economy. Understanding how these rates are set and how they fluctuate can help
individuals and businesses plan for the future and make informed decisions about borrowing,
lending, and investing.
d) Globalization: The global financial system is increasingly interconnected, and events in one part of
the world can have significant effects on other regions. Understanding how the global financial
system works can help individuals and businesses navigate the complexities of international trade
and investment and take advantage of opportunities in the global marketplace.
In summary, understanding how the global financial system works, especially the money and capital
markets, is essential for individuals, businesses, policymakers, and regulators. It can help promote
economic stability, provide access to credit, maximize investment opportunities, and enable informed
decision-making in a rapidly changing global economy.

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2. What are the principal links between the financial system and the economy? Why is each
important to the other? money and capital market?
The financial system and the economy are closely linked, and each is important to the other. The principal
links between the financial system and the economy can be categorized into two main markets: the
money market and the capital market.
a) Money Market: The money market is the market where short-term funds are borrowed and
lent, usually for a period of one year or less. It includes various instruments such as Treasury
bills, commercial paper, and certificates of deposit. The primary function of the money market
is to provide liquidity to financial institutions, corporations, and governments. The money
market plays a critical role in the economy as it allows businesses to access short-term funds
to meet their working capital needs. Additionally, the interest rates in the money market serve
as a benchmark for other interest rates in the economy, such as mortgage rates and credit
card rates.
b) Capital Market: The capital market is the market where long-term funds are borrowed and
lent, usually for a period of more than one year. It includes various instruments such as stocks,
bonds, and mutual funds. The primary function of the capital market is to provide long-term
funding to corporations and governments. The capital market plays a crucial role in the
economy as it allows businesses to access funds to invest in long-term projects such as
research and development, capital expenditures, and acquisitions. Additionally, the capital
market provides investors with opportunities to invest their savings in securities that can earn
them returns over the long term.
The financial system is important to the economy because it provides the necessary funding for
businesses and governments to operate and invest. It also helps to allocate resources efficiently by
matching savers with borrowers. Efficient allocation of resources leads to economic growth, job creation,
and higher standards of living.
The economy is important to the financial system because the financial system is dependent on the
performance of the economy. A healthy economy leads to a healthy financial system, which in turn leads
to more investment opportunities and higher returns for investors. In contrast, a weak economy can lead
to financial instability and a decrease in investment opportunities.

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In summary, the links between the financial system and the economy are crucial. The money market and
the capital market play a critical role in the functioning of the financial system and the economy. A healthy
financial system and a healthy economy are interdependent and are necessary for sustainable economic
growth and development.
3. What are the principal functions or roles of the global financial system? How do the money and
capital markets fulfill those roles or functions?
The principal functions or roles of the global financial system include the following:
a) Mobilizing savings: One of the primary functions of the financial system is to mobilize savings
from households and businesses and channel them to borrowers who need funds for investment
or consumption. The money and capital markets provide the channels for this mobilization of
savings, with banks and other financial institutions acting as intermediaries.
b) Allocating capital: The financial system also plays a crucial role in allocating capital to businesses,
individuals, and governments. The money and capital markets provide a platform for the issuance
of stocks and bonds, which businesses can use to raise capital for investment or expansion.
Governments can also issue bonds to raise funds for public projects.
c) Facilitating transactions: The financial system enables individuals and businesses to transact with
each other by providing a range of payment systems, such as electronic transfers, credit cards,
and checks. The money and capital markets facilitate trading in financial instruments such as
stocks, bonds, and currencies.
d) Managing risk: The financial system helps individuals and businesses manage risk by providing
access to insurance, hedging, and other risk management tools. The money and capital markets
provide a platform for trading in financial derivatives, such as futures and options, which enable
businesses to hedge against price fluctuations in commodities and currencies.
e) Providing liquidity: The financial system provides liquidity to the economy by facilitating the
buying and selling of financial instruments. The money and capital markets provide a platform for
investors to buy and sell stocks, bonds, and other financial instruments, which provides liquidity
to the market.

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The money and capital markets fulfill these roles or functions in several ways. For example:
a) Mobilizing savings: The money and capital markets provide a platform for the issuance of stocks
and bonds, which enable businesses to raise capital for investment or expansion. Banks and other
financial institutions act as intermediaries, channeling savings from households and businesses to
borrowers who need funds.
b) Allocating capital: The money and capital markets provide a platform for trading in financial
instruments such as stocks, bonds, and currencies. This enables investors to buy and sell these
instruments, providing businesses and governments with access to capital.
c) Facilitating transactions: The money and capital markets facilitate trading in financial instruments
and provide payment systems, enabling individuals and businesses to transact with each other.
d) Managing risk: The money and capital markets provide a platform for trading in financial
derivatives, such as futures and options, which enable businesses to hedge against price
fluctuations in commodities and currencies.
e) Providing liquidity: The money and capital markets provide liquidity to the economy by facilitating
the buying and selling of financial instruments. This helps investors to buy and sell assets quickly,
ensuring that the market remains liquid.
In summary, the money and capital markets play a crucial role in fulfilling the functions of the global
financial system. They provide a platform for the allocation of capital, the mobilization of savings, the
facilitation of transactions, the management of risk, and the provision of liquidity.
4. What exactly is savings? Investment? Are these terms often misused by people on the street? Why
do you think this happens?
a) In the context of the money and capital markets, savings refer to the amount of money that
individuals or organizations set aside from their income or revenue, with the intention of using it
in the future. Savings can be made in various forms, including bank deposits, money market
instruments, and other investment options.
b) Investment, on the other hand, is the use of savings or capital to purchase assets that are
expected to generate income or increase in value over time. Investment options in the money and
capital markets include stocks, bonds, mutual funds, and other financial instruments.

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c) The terms savings and investment can sometimes be misused by people on the street, especially
if they are not familiar with the financial system. Some people may use the term savings to refer
to any money that they have, regardless of whether it is saved or spent. Similarly, investment may
be used to describe any financial transaction or purchase, even if it is not actually an investment.
d) This can happen due to a lack of financial literacy and understanding of the financial system.
Many people may not fully understand the importance of savings and investment, or how to
make informed decisions about managing their finances.
To address this issue, it is important to provide education and resources to help people understand the
concepts of savings and investment, and how to make wise financial decisions. This can include financial
literacy programs, access to financial advisors, and easy-to-understand resources that explain financial
concepts in simple terms.
5. How and why are savings and investment important determinants of economic growth? Do they
impact our standard of living?
Savings and investment play critical roles in promoting economic growth, and the money and capital
markets are key mechanisms through which this occurs.
Savings provide the resources that can be used for investment. When individuals or businesses save, they
set aside funds that can be used to finance investment projects, such as the construction of new factories
or the development of new products. Investment, in turn, stimulates economic activity and leads to the
creation of new jobs, increased production, and ultimately, economic growth.
The capital markets facilitate the flow of savings from savers to investors. Savers can invest their funds in
various financial instruments, such as stocks, bonds, and mutual funds, which provide returns on
investment. Investors can then use these funds to finance new projects and expand their businesses.
Furthermore, savings and investment contribute to the development of financial markets, which are
essential for allocating resources to their most productive uses. Financial markets allow savers to invest
their funds in businesses that need capital, and in doing so, they facilitate the creation of new jobs and
industries, which ultimately raises the standard of living.

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Savings and investment also impact our standard of living by contributing to the growth of the economy,
which can lead to increased wages, improved infrastructure, and more opportunities for education and
healthcare. Higher levels of savings and investment can also lead to technological innovation, which can
further drive economic growth and increase the quality of life.
In summary, savings and investment are critical determinants of economic growth, and the money and
capital markets are essential mechanisms through which they are facilitated. Through investment, savings
provide the resources necessary to promote economic activity, which ultimately leads to higher standards
of living.
6. What seven vital functions does the financial system of money and capital markets perform
The financial system performs several vital functions in the money and capital markets, which are crucial
for the smooth functioning of the economy. Here are seven of the most important functions of the
financial system:
a) Mobilization of savings: The financial system facilitates the mobilization of savings from
individuals, households, and businesses and channels them to productive investments.
b) Allocation of resources: The financial system helps to allocate resources efficiently by directing
funds to the most productive and profitable investment opportunities.
c) Risk sharing: The financial system enables individuals and businesses to share and transfer risk
through insurance, hedging, and other risk management tools.
d) Payment system: The financial system provides a means of payment for goods and services
through various payment methods such as credit cards, electronic transfers, and checks.
e) Liquidity provision: The financial system ensures that there is sufficient liquidity in the economy by
providing access to funds when needed through various financial instruments.
f) Price discovery: The financial system helps in price discovery by determining the price of financial
assets and commodities based on market demand and supply.
g) Intermediation: The financial system acts as an intermediary between borrowers and lenders,
facilitating the flow of funds between them and enabling them to meet their financial needs.

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7. Why is each function of the financial system important to households, businesses, and
governments? What kinds of lives would we be living today if there were no financial system or
no financial market?
Each function of the financial system is crucial for households, businesses, and governments in different
ways. Here are some of the reasons why:
a) Mobilization of savings: Without the financial system, households, businesses, and governments
would have limited options to save and invest their money. This could result in low levels of
investment, slow economic growth, and limited opportunities for wealth creation.
b) Allocation of resources: The financial system helps to allocate resources efficiently, which can lead
to higher productivity, innovation, and economic growth. Without this function, resources may be
misallocated, resulting in inefficient use of resources and lower economic growth.
c) Risk sharing: The financial system enables households, businesses, and governments to share and
transfer risk, which is essential in managing financial uncertainties. Without this function,
individuals and businesses may be exposed to high levels of financial risk, resulting in reduced
investment and economic activity.
d) Payment system: The financial system provides a means of payment for goods and services, which
is essential for households, businesses, and governments to conduct daily transactions. Without
this function, the economy would likely revert to a barter system, which would be less efficient
and more cumbersome.
e) Liquidity provision: The financial system provides access to funds when needed, which is crucial
for households, businesses, and governments to meet their financial needs. Without this function,
individuals and businesses may face difficulty accessing credit, which could hinder investment and
economic growth.
f) Price discovery: The financial system helps in price discovery, which is important for households,
businesses, and governments to make informed financial decisions. Without this function, it
would be difficult to determine the fair value of financial assets and commodities, resulting in a
lack of transparency in financial markets.
g) Intermediation: The financial system acts as an intermediary between borrowers and lenders,
facilitating the flow of funds between them. Without this function, it would be difficult for
households, businesses, and governments to access credit, resulting in limited investment and
slower economic growth.

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In summary, without the financial system or financial markets, households, businesses, and governments
would have limited access to credit, savings, and investment opportunities. Economic growth would likely
be slower, and individuals and businesses would be exposed to higher levels of financial risk. The daily
transactions we take for granted, such as paying bills, borrowing money, and investing in stocks, would be
much more difficult, and overall, our lives would be less prosperous and more uncertain.
8. What exactly do we mean by the term wealth? Why is it important?
When we talk about wealth in the context of money and capital markets, we are usually referring to the
value of financial assets held by individuals, businesses, and governments in these markets. This includes
stocks, bonds, commodities, and other financial instruments.
Wealth is important in money and capital markets because it drives investment and economic growth.
When individuals, businesses, and governments have wealth in the form of financial assets, they can invest
in new projects, expand their operations, and create jobs. This can lead to economic growth and
prosperity.
Wealth is also important because it provides a measure of financial security and stability. For individuals,
having wealth in the form of financial assets can provide a cushion in case of unexpected events such as
job loss, illness, or accidents. For businesses and governments, having financial assets can help them
weather economic downturns and other challenges.
Finally, wealth is important because it can be used to fund important social programs and public services.
Governments can use the wealth generated by money and capital markets to fund public education,
healthcare, and infrastructure projects that benefit society as a whole.
Overall, wealth is a key driver of investment and economic growth in money and capital markets, and it
plays a critical role in providing financial security, supporting public services, and driving overall
prosperity.
9. What is net financial wealth? What does it reveal about each of us?

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Net financial wealth is a measure of an individual or household's financial assets minus their financial
liabilities. It includes all financial assets, such as cash, savings, investments, and retirement accounts, as
well as any outstanding debts, such as mortgages, credit card debt, and student loans.
Net financial wealth is an important measure of an individual or household's financial health and stability.
It reveals how much they have in financial assets that can be used to support their lifestyle, cover
unexpected expenses, and plan.
Net financial wealth can also reveal important differences in wealth and financial stability among different
individuals and groups. For example, individuals with higher net financial wealth are typically better able
to weather financial challenges and take advantage of investment opportunities than those with lower net
financial wealth. Additionally, disparities in net financial wealth can reflect broader economic and social
inequalities.
Overall, net financial wealth is an important measure of an individual or household's financial health and
stability, and it can reveal important differences in wealth and financial well-being among different
individuals and groups.
10. Can you explain what factors determine the current volume of financial wealth and net financial
wealth each of us has?
a) Income: Higher levels of income can provide individuals with more resources to save and invest in
financial assets, which can increase their financial wealth.
b) Investment returns: The performance of financial markets and the individual investments held
within those markets can have a significant impact on an individual's financial wealth. When
investments perform well, this can increase financial wealth, while poor performance can decrease
it.
c) Savings rate: The amount of money an individual saves and invests can impact their net financial
wealth. Higher savings rates can lead to higher levels of net financial wealth, while lower savings
rates can result in lower levels of net financial wealth.
d) Debt level: The amount of debt an individual holds can impact their net financial wealth. High
levels of debt can reduce net financial wealth, while low levels of debt can increase it.
e) Financial literacy and investment knowledge: An individual's level of financial literacy and
investment knowledge can impact their ability to make informed investment decisions that can
increase financial wealth.

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f) Economic conditions: Broader economic conditions, such as interest rates, inflation, and economic
growth, can impact financial wealth and net financial wealth by influencing investment returns
and the value of financial assets.
Overall, the current volume of financial wealth and net financial wealth that each of us has in money and
capital markets is influenced by a variety of factors, including income, investment returns, savings rates,
debt levels, financial literacy, and broader economic conditions.