Question

Explain what happens in an economy when the

financial markets limit access to capital. How does this affect economic growth and employment?

Short answer

When the financial markets limit access to capital, there are various limitations that occurred in the market.

Step-by-step solution

Step 1. Definition

A financial market is a market where trading in financial securities and derivatives is done.

Step 2. Explanation

Meanwhile, financial markets limit access to capital, because of this the economy slows down. as there is limited capital means the supply of the funds for business is also limited. The new firms are unable to get capital and the old firms can’t expand their operations because of this capital crunch. Consequently, the hiring of the firms will reduce and lower output. Thus, unemployment increases and output reduces. Cost of the capital rise and demand comes to a low and has reduced the overall economy to a slowdown.