2. Explain different types of financial systems and discuss whether Market Based system is superior to that of the bank based.

ANSWER KEY:

a. start with explaining flow of funds mechanism, briefly explain direct and indirect finance;

b. Explain what a financial system does(i.e. mobilize savings, risk reduction through diversification, etc);

c. explain moral hazard and adverse selection and informational asymmetries;

d. Based on these discuss which financial system is better than the other (use your own words and ideas to yield better grade)