MOCK EXAM
Demand 1.
What is the financial system? (5 Points)
Financial systems produce and exchange financial instruments; provide transfer and allocation of
funds from resources to uses; provide regulation and control over these activities.
What functions does it perform? (5 Points)
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borrowing and lending
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ownership and control allocation
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diversification of wealth
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saving and investment coordination
Demand 2.
a) State and comment on the necessary conditions for the efficiency of financial
markets. (5 Points)
perfect competition: free entry/exit, no price maker dominants
no transaction costs: no additional cost over the market cost of the effect in transaction
perfect information: all relevant information is available for all operators/players
b) In an efficient market, why are the prices of the securities different from each other? (5
Points)
as the demand and supply for certain assets are changing constantly, so the market interest rate is
in constant change
Demand 3.
What are the main results found by F. Allen, M.K.F. Chui, A. Maddaloni in the paper
"Financial Systems in Europe, the USA and Asia" (10 points)
1. Majority of assets are held by financial intermediaries. Institutional investors are important in
order to understand the role of the structure of the financial system for the efficiency-stability of
the economy. 2. It is crucial to consider housing and mortgage markets as part of the financial
structure: • Importance of housing for household’s wealth → efficiency • Effects of boom-bust
cycles → financial stability • Mortgage features → transmission of monetary policy Which
financial structure is the best? No answer now… Need more research on this topic in order to
answer… but sure bank-based and market-based classification is not enough.