BA-BHAAI1038U - Preliminary Assignment

1. How is economic development impacted in societies without banks?
Economic development is hindered in societies without banks, due to the fact that banks e.g. provide loans for individuals as well as businesses, hence encouraging economic development through an increase of consumer activities and industry growth, which otherwise would not be possible due to a lack of funding. The absence of banks would therefore limit the economic development and growth by preventing individuals from purchasing e.g. houses, cars and other consumer goods, and limiting the businesses’ access to start-up capital or financing of business development activities. Alternatively, a lack of reliable banks could lead individuals to agree to unfavorable loan conditions with extremely high interest rates from for instance loan sharks, possibly leaving them worse off than before and unable to pay the loan back.

2. Historically, how has political instability impacted bond markets?
Historically, political instability has caused governments to sell bonds to citizens in order to finance e.g. wars. As the return you get on a bond is highly related to the riskiness of the investment, the price of bonds would typically go down during periods of political instability, due to the decreased credibility of the government and the unwillingness among citizens to invest in bonds, causing the returns to be higher. Furthermore, political instability has previously pressured the governments to increase the supply of printed money, which made the inflation spike. As bonds normally have a fixed interest rate, the bondholders are not compensated for the loss of value caused by high inflation, why inflation causes bond prices to fall.

3. What factors typically contribute to the formation of bubbles? Prior to the formation of a bubble, there is typically a big