EFB201 Financial Markets Q&A Chapter 1

6 Pages • Topic Notes • Year: Pre-2021

1.1 Explain the key roles of the financial system. Why is it so important to the broader economy to have an efficient and effective financial system? Financial markets are the markets for buying and selling financial instruments. Financial markets have five primary functions: 1. Facilitating the flow of funds 2. providing the mechanism for the settlement of transactions 3. generating and disseminating information that assists decision making 4. providing means for the transfer and management of risk 5. provide ways of dealing with the incentive problems that arise in financial contracting Having an efficient and effective financial system is critical as it facilitates commercial, retail and government transactions in a timely, low cost and reliable way. The opposite would be a system where funds take a long time to reach their destination (i.e. direct debits may take weeks), with high cost (significantly greater transactions costs) and with great risk (to either their value or likelihood of arrival). An efficient and effective financial system will also produce actual and timely information to enable effective financial decision making, which is also important in the complex financial world of today. When one considers what we take for granted in the financial system (EFTPOS, Electronic Transfer, Direct Debit, etc.) in terms of its reliability) and consider the time and cost involved in doing this manually, one can see the importance of the financial system.

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