Module 1 Introduction & Institutional Setting

Question 1

Which of the following statements is most correct?
A. In a world without financial intermediaries the level of fund flows between
household savers and the corporate sector is likely to be as high as it is with
financial intermediaries.
B. In a world without financial intermediaries funds would directly flow from
surplus units to deficit units.
C. In a world without financial intermediaries lenders (household) would
need to monitor the actions of the firms to which they have lent their funds.
D. In a world without financial intermediaries funds would directly flow from
surplus units to deficit units and lenders (household) would need to monitor
the actions of the firms to which they have lent their funds

Answer 1

D. In a world without financial intermediaries funds would directly flow from
surplus units to deficit units and lenders (household) would need to monitor
the actions of the firms to which they have lent their funds

Question 2

Why do households prefer to use FIs as intermediaries to invest their
surplus funds?
A. Transaction costs are low to the household since FIs are more efficient in
monitoring and gathering investment information.
B. To receive the benefits of diversification that households may not be able
to achieve on their own.
C. The FI can benefit from combining funds and negotiating lower asset prices
and transaction costs.
D. All of the listed options are correct.

Answer 2

All of the listed options are correct.