Question

What does it mean for a financial market to be considered (a) informationally efficient and (b) economically efficient?

TYPED ONLY PLEASE

Answer 1

Answer :

Financial market is a market in which financial assets are traded. The financial market is to be considered as

a) Informationally efficient : financial market is considered yinformationally efficient in the following cases

1)information aggregation and coordination : financial market act as collectors and aggregators of information and financial asset values and flow of fund from borrowers to lenders.

2)it need to reduce transactions and information costs.

3)Existence of a well organised banking system, which provides or supply's the fund in the market.

4)need to provide the mechanism to achieve equilibrium between demand and supply of short-term funds.

5)price determination :financial market provides means by which prices are set both for newly issued financial assets values and flow of fund from lenders to borrowers.

6)generate and apportion of credit.

(b) Economically efficient :financial market is said to be economically efficient in following cases

1)financial markets permits the transfer of funds from one agent to another or for either investment or cons uno purposes.

2)availability of proper credit instruments. There need to be number of dealers to deal with such instrument.

3)proper coordination among different sectors like organised and unorganised sectors.

4)mobilising the savings of the country and direct it to productive purposes.

5)financial markets need to offer productive investment of savings, which create income and helps in formation of further capital.

6)Financial markets need to act as a window of economic development of the nation. It need to work as a bridge between the savers and investors of the country.

7)The interest rate may not varying too much among different financial institutions.

8)Helps in controlling inflation .

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