Q2. When interest rates fall, how might you change your economic behavior? Answer: Q3: Why are...

Q2. When interest rates fall, how might you change your economic behavior? Answer:

Q3: Why are financial markets important to the health of the economy? Answer:

Q4: Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense? Answer:

Expert Solution

2. When interest rates fall, how might you change your economic behaviour?

Changes in interest rates can have different effects on consumer spending habits. When rates go down, one may no longer wish to save, but instead spend and invest, even taking out loans to consume at low interest rates.

3. Why are financial markets important to the health of the economy?

Financial markets are extremely important to the general health of an economy. With effective markets for credit and capital, borrowing and investment will be limited and the whole macro-economy can suffer. Financial markets help to efficiently direct the flow of savings and investment in the economy in ways that facilitate the accumulation of capital and the production of goods and services. The combination of well-developed financial markets and institutions, as well as a diverse array of financial products and instruments, suits the needs of borrowers and lenders and therefore the overall economy.

4. Economies in developing countries grow so slowly is that they do not have well-developed financial markets.

This argument makes sense. Financial markets are essential to promoting economic efficiency because they allow funds to be transferred from a person who has no investment opportunities to one who has them. It's very difficult and expensive to do in undeveloped markets. Microfinance tries to develop financial markets to aid in transactions.The cost of capital for investments is high due to the underdevelopment of financial markets.Interest rate to be paid by borrowers and that received by lenders would be high. If stock markets are not well developed, investors may not get capital which can share the risk. If venture capital and other such funds are underdeveloped, new entrepreneurs may not get capital, and only those who have own wealth can start enterprises.

jeff jeffy answered 2 years ago

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