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) - borrowing and lending - ownership and control allocation - diversification of wealth - 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.