Question

Define ‘financial market’. How (a) moral hazard and (b) adverse selection can affect
financial market stability? – Explain

Answer 1

financial market

A market where trade of financial securities like stock, bond ,precious Metals etc. and derivatives take place at low transaction costs

a financial market,

When borrower willfully done some activities which are undesirable from the point if view of lendr ,but borrower doing them these activities to reduce the chance of paying the loan and Benifit from them called as moral hazard . Such defaulter think such by taking consideration that someone will pay for his loans.

Adverse selection

There is asymmetric (unequal) information or mismatch of information between buyers and sellers.such type of situation some time lead to distorts the market and it's failure.For example, if insurance buyrer may have better information than sellers, then person who is buying this is in win win situation.