Explain the principal contributions made by a financial market to an economy. State the advantages and...

Explain the principal contributions made by a financial market to an economy. State the advantages and disadvantages of each

Expert Solution

Financial markets help in capital allocation to companies through debt and equity markets. Companies can issue capital from bond and equity market and utilize it to produce goods and services which boosts the economy.It provides assess to low cost sources of capital, which increases value of firms , hence helps to expand the economy.

Advantages:
1. It eliminates information asymmetry ,hence protects both the lender as well as borrower and also investor and the company.
2. It creates liquidity in the market which increases the efficiency in the economy.

Disadvantages:
1. Only limited companies can easily access the financial market. For financial market is not for all.
2. During economic downturn credit rating agencies easily manipulated the financial market and hence caused huge losses to the economy. This caused allocation of capital to loss making companies or less credit worthy companies

jeff jeffy answered 2 years ago

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