The financial sector

• What is a financial market?

  Where buyers and sellers trade monetary assets
• What does the Harrod-Domar model emphasize?

  Savings fund investments and growth rates
• What is microfinance?

  Financial services for poor households
• How does a high interest rate affect consumer behavior during inflation?

  Encourages saving and reduces spending
• What is the effect of a low interest rate during low inflation?

  Encourages spending and investment
• What historic low did the UK interest rate reach in March 2009?

  0.5%
• What role does the financial sector play in facilitating saving?

  Provides a place for funds storage
• How does the financial sector lend to businesses and individuals?

  Transfers funds between economic agents
• How do financial markets facilitate the exchange of goods and services?

  Enables interaction between buyers and sellers
• What do forward markets in currencies and commodities allow?

  Trading contracts for future delivery
• Why is a secure financial sector important in developing economies?

  Promotes economic development and stability
• What does limited wealth in developing countries lead to?

  Focus on immediate needs and survival
• Why is capital investment difficult in Africa?

  Lower saving rates increase borrowing costs
• What does the Harrod-Domar model require for economic growth?

  Investment, saving, and technological change
• How is the rate of growth in the Harrod-Domar model calculated?

  $\text{Savings ratio} / \text{capital output ratio}$
• What is a limitation of the Harrod-Domar model regarding AD?

  Increased savings can reduce aggregate demand
• What are some limitations of the Harrod-Domar model?

  Poor financial systems and low savings propensity
• What does microfinance involve?

  Borrowing small amounts for enterprises
• How does microfinancing help businesses?

  Reduces dependency on exploitative loans
• What role does the financial sector play in providing funds?

  Facilitates saving for future investments
• How does the financial sector help manage the economy?

  Enables control through fiscal and monetary policies
• How do financial markets raise capital for firms?

  Through stock market investments
• How does the financial sector encourage investment?

  Facilitates borrowing for business expansion
• How can governments raise funds through the financial sector?

  By issuing bonds or bills
• What is a foreign currency gap?

  Insufficient capital flows for deficits
• What is capital flight?

  Capital leaving due to economic threats
• What is the impact of high debt on developing countries?

  Diverts resources from essential services
• What is debt relief?

  Forgiveness of partial or total debt
• What is a financial market?

  A place where buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary
• What is the Harrod-Domar model?

  A model that states savings provide the funds used for investment, and growth rates depend on the level of saving and the productivity of investment
• What is microfinance?

  Schemes that aim to give poor and near-poor households permanent access to a range of financial services
• What is the relationship between the inflation rate and a high interest rate?

  The reward for saving is high and the cost of borrowing is higher, encouraging consumers to save more and spend less, and is used during periods of high inflation
• What is the relationship between the inflation rate and a low-interest rate?

  The reward for saving is low and the cost of borrowing is low, meaning consumers can access credit cheaply, which encourages spending and investment
• What is the first role of the financial sector in the real economy?

  To facilitate saving
• What is the second role of the financial sector in the real economy?

  To lend to businesses and individuals
• What is the third role of the financial sector in the real economy?

  To facilitate the exchange of goods and services
• What is the fourth role of the financial sector in the real economy?

  To provide forward markets in currencies and commodities
• Why is a secure and stable financial sector important in emerging and developing economies?

  To promote economic development because without a financial sector, consumers and firms cannot generate sufficient savings to make the macroeconomy stable
• What does limited wealth in developing countries lead to?

  Consumers have to focus on their immediate needs, including food and safe water, to ensure they can survive. Without sufficient savings, there is inadequate capital accumulation
• Why might it be difficult for capital investment to take place in Africa?

  Africa's saving rate is around 17%, whilst the average for middle-income countries is around 31%. This makes it more expensive for the African public and private sectors to get funds since they have higher borrowing costs