B Com Exam > B Com Notes > Financial Markets and Institutions > Equilibrium in Financial Markets - Financial Markets and Institutions
Equilibrium in Financial Markets - Financial Markets and Institutions | Financial Markets and Institutions - B Com PDF Download
equilibrium conditions- where money supply equals money demand
- money supply generally given as a constant (vertical line)
- doesn't change w/ interest rate
- Ms = Md
- Md / $Y = L(i)
- Md / $Y - ratio of money demand to nominal income (fraction of total income that ppl hold as money)
- LM relation - equilibrium at intersection of money supply and money demand (downward sloping curve dependent on interest rate i from L(i))
- interest at level that that cause ppl to hold Md equal to Ms
- if Md=Ms then Bd=Bs since (wealth = B+D and wealth stays constant)
- changes in $Y >> shift of Md curve
- changes in interest rate >> mov't along curve
- money supply (not dependent on interest rate at all)
- money demand
- equilibrium
- higher $Y >> higher interest rate
- lower $Y >> lower interest rate
- money demand always equals money supply at equilibrium, so interest rate adjusts
- need higher interest rate w/ higher income to compel consumers to invest and have the same money demand as before, etc
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FAQs on Equilibrium in Financial Markets - Financial Markets and Institutions - Financial Markets and Institutions - B Com
| 1. What is meant by equilibrium in financial markets? |  |
Ans. Equilibrium in financial markets refers to a state where the demand for financial assets, such as stocks and bonds, matches the available supply. It occurs when the price of these assets reaches a level where buyers are willing to buy exactly the same quantity that sellers are willing to sell. In other words, it is a point of balance where the quantity demanded equals the quantity supplied, resulting in a stable market price.
| 2. How does equilibrium in financial markets affect investors? | |
Ans. Equilibrium in financial markets has a significant impact on investors. When the market is in equilibrium, it indicates that the price of financial assets reflects all available information and expectations. Investors can make informed decisions based on this equilibrium price. If an asset is priced below its equilibrium level, investors may consider it undervalued and purchase it. Conversely, if an asset is priced above its equilibrium level, investors may consider it overvalued and sell it. Equilibrium provides a benchmark for investors to evaluate investment opportunities.
| 3. What factors can disrupt the equilibrium in financial markets? | |
Ans. Several factors can disrupt the equilibrium in financial markets. Some of the key factors include changes in interest rates, economic indicators, geopolitical events, and investor sentiment. For example, if there is a sudden increase in interest rates, it can lead to a decrease in the demand for financial assets, causing the market to move away from equilibrium. Similarly, negative economic news or political instability can create uncertainty among investors, leading to a shift in supply and demand dynamics. These factors can cause temporary or long-term disruptions in the equilibrium of financial markets.
| 4. How do financial institutions contribute to maintaining equilibrium in financial markets? | |
Ans. Financial institutions play a crucial role in maintaining equilibrium in financial markets. They act as intermediaries between buyers and sellers, ensuring smooth transactions and liquidity in the market. Financial institutions provide various services such as brokerage, asset management, and market-making, which facilitate the trading of financial assets. They help match buyers with sellers and ensure that the market operates efficiently. Additionally, financial institutions also provide information and analysis to investors, helping them make informed decisions and contribute to the overall equilibrium of the market.
| 5. Can equilibrium in financial markets ever be permanently achieved? | |
Ans. Achieving permanent equilibrium in financial markets is highly unlikely. Financial markets are influenced by a wide range of factors, including economic conditions, investor behavior, and external events. These factors are constantly changing, making it difficult for the market to remain in a state of permanent equilibrium. However, markets strive to reach equilibrium in the short term as participants react to new information and adjust their buying and selling decisions accordingly. While temporary equilibrium can be achieved, the ever-changing nature of financial markets makes permanent equilibrium an elusive goal.
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