Question

1. What are financial markets? Critically discuss the extent to which financial markets can facilitate

economic growth and development. When are financial markets effective? Can financial regulation

help to ensure the efficiency of financial markets? Why? (

You must use specific regulations

)

2. How does the Federal Reserve of the US use financial markets to stabilize the US economy and the

value of the US dollar? In what situations can financial markets be ineffective mechanisms to

stabilize the US economy? Using the various theories of interest rates in the loanable funds market,

explain why the Fed may not always be able to successfully target short-term interest rate.

Answer 1

1).The financial markets are the markets where there is exchange and trading of financial instruments used to take place in over the counter. There are type of market one is primary and one secondary market. Financial market of any country are the backbone of their economy where the financial market used to have the important role in the development of the economy, however the the rules and regulations prescribed in the financial markets are the controlling parameters of the market which actually controls the economy. The growth and the development of the economy majority rely on the movement in the financial market, however the secondary market fluctuate with the movement by the steps taken for the betterment of the economy the monetary policy, the GDP, inflation and other sectorial behavior which has a direct impact on the the financial market.

For an example, the regulations made for the the long term capital gain will create the impression in the financial market for not to hold the security for a longer period rather they can liquid those security in shorter period to avoid the capital gain tax on it, so this is the one example however similarly there are other regulations which do create the impression of the growth and development of the financial market parallel to the economy growth along with the sectorial development.