C48 MT 07F A - NAME STUDENT # UTSC: ECM C48 Midterm (Do ALL...

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NAME STUDENT # UTSC: ECM C48 Midterm (Do ALL SIX questions) Question 1. (15 Marks) ANSWER (FALSE) King and Levine do argue that financial market development is beneficial to a country in certain ways such as faster economic growth presently and in the future. Their research did not directly speak for or against government regulation. As such some might argue that King and Levine have nothing to say on this topic but this need not be the case. While King and Levine did not argue for government regulation they did not argue against it either. In fact, while some government regulations may pose an impediment to economic growth such regulations do not impose significant limits on economic growth these regulations work to foster (more) financial market development. That is, government regulations are a necessary part of the economy and if they help to create greater (domestic) financial market development, then according to King and Levine’s research, these regulations are beneficial to future economic growth rather than a hindrance. Similarly, King and Levine do not claim that countries with high levels of financial market development are not open to sudden “shocks” that can have permanent effects on the economy. For example, think of the currency crisis that hit East Asia in the late 1990’s. Government regulations and institutions may help to make a more transparent and accountable economy that while still exposed to such shocks is ultimately impacted by them to a much smaller degree. If government is working like this then it is assisting longer term economic growth and future prosperity of the members of the domestic economy. Thus the claim is false. Government regulations are not an evil according to King and Levine that should be eliminated completely. They, like many others, might more reasonably argue for limits on such regulations so that they foster the greater good by assisting (rather than limiting) domestic financial market development.
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Question 2. (15 Marks) Operational efficiency relates to how well the financial system undertakes the function of transferring funds from lenders to borrowers (operational costs). If banks are highly competitive the costs associated with this function should be small. Operational efficiency is impacted by (de)regulation, market As explained in the diagram below, operational efficiency is measured in terms of the welfare impact on society, that is, both consumers of bank products (households and firms) and banks (suppliers or financial institutions). In fact, this efficiency is often quoted in terms of the inefficiency or deadweight welfare loss that results from the way the market for loanable funds operates. This is measured at a point in time relative to the ideal perfectly competitive outcome (which would have no deadweight welfare loss). When considered this way it becomes clearer that operational is in essence a relative measurement
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C48 MT 07F A - NAME STUDENT # UTSC: ECM C48 Midterm (Do ALL...

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