For each of the functions cited below, explain how financial markets perform each function in detail.

1. They make it possible for corporations and governmental units to raise capital. (2 marks)

2. They help to allocate capital toward productive uses. (2 marks)

3. They provide an opportunity for people to increase their savings by investing in them. (2 marks)

4. They reveal investors judgments about the potential earning capacity of corporations, thus giving guidance to corporate managers. (2 marks)

5. They generate employment and income.

Explain whether each of the following situation involves adverse selection and moral hazard or not:

i) I am financing a new car. In applying for a loan, I withhold information about my student loan, and the loan does not show up on my credit report. (2.5 marks)

ii) Just before quitting my job, I take out all the credit cards I can. I plan to run them up to the5 limit and declare bankruptcy. (2.5 marks)

iii) I take out a loan to manufacture a product. My costs end up being higher than expected, and there seems to be little market for my product. I am unable to repay the loan on time. (3 marks)