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Market Institutions, Financial Market Risks, and Financial Crisis
Property rights are protected, people can be trusted to keep their promises, externalities are controlled, competition is encouraged, and information flows smoothly thanks to market-supporting institutions. Markets are extremely important institutions. They make trade easier. More trade equals more output. More output translates to more jobs and better national revenue.
Financial markets are linked to a variety of financial risks. When a crucial sector of the market struggles, as it did during the global financial crisis of 2007–2008, it can have a significant impact on the overall financial health of the market. Businesses closed, investors lost money, and governments were compelled to reassess their monetary policies at this time. Many other occurrences, however, have an impact on the market.
In a financial crisis, asset prices plummet, consumers and businesses are unable to pay their loans, and financial institutions confront a liquidity shortage. A bank run or panic is often associated with a financial crisis, in which investors sell their assets or remove money from their savings accounts because they feel the value of their assets will fall if they stay in the financial institution.
A financial crisis could be caused by a variety of factors. When companies or assets are overpriced, a crisis can occur, which can be exacerbated by investors acting irrationally or in a herd-like manner. When a bank failure is rumored, a rapid succession of closures, for example, might result in decreased asset prices, leading people to sell their assets or remove large sums of money from their savings accounts.
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