Question

Explain what SYSTEMIC RISK is. & give real life examples. provide 2 examples and use at least 4 lines.

ECON MONEY AND BANKING CLASS

Answer 1

Systematic risks

Systematic risks are also known as market risks. It affects not only the stock market but the whole market. These types of risks are unavoidable which cannot be mitigated through some changes but it can be solved only by correct strategies.

For example:

1. Natural disasters

Nobody can control natural disasters. It happen in some specific parts of an economy which does not affect the whole market of the world but the entire country affects the important organization of that country. The impact of the natural disasters are wide spread. The warnings of the natural disasters are given from before hand. But in the under developed countries the warnings does not reach the people at the correct time. These types of risks are called systematic risks.

2. Tax reforms

Tax reforms are sources of systematic risks. It can have positive as well as negative impacts. When the government reduces the public taxes it has a positive impact in the market. But when the government increases the taxes on goods and services it has negative impact in the market. Suppose the government increases the tax from 5% to 15% on goods and services it has negative impact on the market.