Here is a compilation of essays on 'Financial Economics' for class 10, 11 and Find paragraphs, long and short essays on 'Financial Economics' especially.
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However, contrary to the benefits often ascribed to becoming banked, I find no effects on saving, self-reported overspending, and several measures of "financial wellbeing" such as finances-related stress. Surprisingly, I find only small aggregate effects of opening an account on actual usage of mainstream credit, as measured by credit card ownership, for example. There is heterogeneity in these effects, however, based on an individual's level of financial literacy.
Those who graduated high school and who are presumably more financially literate do in fact increase their usage of mainstream credit when they open an account, but those who did not graduate high school do not. This finding is consistent with prior evidence on the links between financial literacy and usage of financial services: Finally, I find that access to mainstream financial services enhances the effectiveness of financial education: In the second essay I explore the theoretical effects of one of the most important consequences of entering the mainstream financial system: I develop a simple two period life-cycle model of consumption in which voluntary default is possible and examine the effects of favorable changes in saving and borrowing rates on consumer behavior.
The incorporation of default in the model is important for its applicability to the effects of entering the mainstream financial system since those who operate outside the mainstream system tend to be low-income individuals who are more prone to default. It is also novel: I find that when the cost of default is not sufficiently dependent on the amount defaulted upon, the possibility of default weakens the link between first period consumption and second period utility and leads to overconsumption relative to the no-default model. It also results in a counter-intuitive negative marginal propensity to consume out of wealth: It follows that the wealth effects of favorable interest rate changes imply less rather than more consumption and that such rate changes the ultimate effects of which are determined by the combination of wealth and substitution effects are more likely to encourage saving and to discourage borrowing than in the no-default model.
Favorable rate changes decrease the probability of default and the expected defaulted-upon amount for all savers, who may default on a pre-existing obligation in the model, as well as for borrowers who initially borrow more than some threshold. All these factors are factors of production in the productive process, called the economic activity.
Economics is a science dealing with scarce means and unlimited ends. Finance being scarce, the relation of finance with Economics is quite important. The end use of all activity is the consumption-demand backed by purchasing power. Production is a type of economic activity which combines all the factors of production as inputs and brings an output called production.
The relationship between inputs and outputs is a function of technology, which in modern economic jargon leads to input-output matrix.
The intermediary between Production and Consumption is Distribution which is a vital link in the circularity of economic activity. The importance of Finance in Economics can hardly be over-emphasised in view of the above facts. In the classical Writings of Adam Smith and others, Economics is considered a handmaid of Ethics, but in the modern technology Economics is a handmaid of Finance. Economic activity relates to the real world of physical goods, and services while Finance relates to the money world.
The distinction between real values and money values will be clear if one keeps in mind the functions of money. Since we are used to denominate everything in terms of money, the distinction between them is blurred. If we know the distinction between the barter economy and money economy, the role money and the distinction between money economy and real economy becomes clear.
In barter economy goods and services are exchanged for goods and services and the value of each is set by the relative scarcity and abundance in relation to demand for it. This brings us to the demand and supply factors in the money economy. In classical writings money is neutral. This equation sets up an identity between the total Money in demand MV and the total value of transactions PT.
Essay on Financial Economics | Branches | Economics
While PT is a function of real variables, MV is a function of money variables. Given the quantity of money, velocity will change as per the total value of real transactions. This equation emphasises the role of money in transactions. The next stage of development of the concept of Money as a functional variable in the real economy is given by the Cambridge Equation of Exchange as expounded by Marshall and Pigou. People prefer to hold only a proportion K of the level of income or output represented by PT. The other improvement is the introduction of the concept of choice and the alternatives foregone in holding cash balances as the income in the form of interest foregone on the alternatives.
But the role of interest rate, which determines the liquidity preference of the people and as a determinant of the demand for money is not brought out clearly by the Cambridge school of thought. It brought in the non-neutral character of Money in the real world as against classical theory which treated money as neutral to the real world. It is called general theory as it has brought out the integration of Monetary Theory and the Theory of Employment and Output.
While the former is the money factor, the latter is the real factor.
Their integration is brought out by the role of interest rate. According to Keynes, the rate of interest is a reward for parting with liquidity that is cash. It is the price which equilibrates the desire to hold wealth in the form of cash and the available quantity of cash. Liquidity Preference Theory of Keynes refers to the desire of the people to hold money as an asset because it is the most liquid form of assets and can be converted into any other form of asset later.
- Academic Commons!
- Major Roy und die Botschaft des Meisters (Major Roys Abenteuer) (German Edition).
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- The Spiral Path.
While the first two categories of demand for money are income elastic and not interest elastic, the third category is purely interest elastic. So both income and interest rates together influence the Money demand. The role of interest rate in both the money sector and real sector brings about the needed integration of Finance with Economics.
To explain this, aggregate supply function of Keynes and Aggregate demand function interact and the equilibrium point between those two functions determines the level of employment and income for the economy. Consumption function depends on the marginal propensity to consume and the level of income. Investment function is dependent upon the expected rate of profit or marginal efficiency of capital and the interest rate. MPC is marginal propensity to consume.
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While MEC is marginal efficiency of capital. MEC is the expected annual rate of profit over the life of the machine. It is rate of discount which makes the sum of prospective yields equal to the cost of machine. The rate of interest should be lower than the marginal efficiency of capital. At some level of income and consumption higher interest rates may reduce consumption expenditure and increase savings and investment but savings is also a function of interest rate. It is this interest rate that links both Savings and Investment and the role of Savings and Investment on output and employment in the real economy which is the starting point of Financial Economics.
AI is the incremental capital employed in an enterprise. This will lead to increase in incomes of factors and consumption and savings and these savings are further invested to lead to a multiplier increase in incomes.
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If the multiplier is 5, an investment of Rs. Accelerator complements the investment multiplier in promoting the real growth in the economy. An increase in consumption demand may lead to induced investment expenditure. Through the effects of changes in investment expenditure on the consumption expenditure, the accelerator principle operates to produce the effect of changes in consumption expenditure on induced investment expenditure.
This will lead to further increase in income. The Theory of Investment multiplier is attributed to J. Keynes, while the Theory of Accelerator is credited to many writers like J. Hicks, Harrod, and Samuelson etc. The combined effect of investment multiplier and accelerator on income is more than the original increase in investment.