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Chapter 2: Q.16 (page 97)

鈥淚n a world without information costs and transaction costs, financial intermediaries would not exist.鈥� Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

Yes. In a world without transaction cost and information cost there will be no intermediary.

Step by step solution

01

Step 1. Introduction

Perfect information implies that economic agents in the market possess complete and immediate knowledge of all market prices, their own utility, and their own cost functions.

02

Step 2. Explanation

If therearen't any informational or transactions costs, human beings may want to make loans to every different for gratis and could accordingly don't have any want for economic intermediaries

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Most popular questions from this chapter

Give at least three examples of a situation in which financial markets allow consumers to better time their purchases.

The most famous financial market in the world is the New York Stock Exchange. Go to http://www.nyse .com.

a. What is the mission of the NYSE?

b. Firms must pay a fee to list their shares for sale on the NYSE. What would be the fee for a firm with five million common shares outstanding?

Some economists suspect that one of the reasons economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense?

A significant number of European banks held large amounts of assets as mortgage-backed securities derived from the U.S. housing market, which crashed after 2006. How does this demonstrate both a benefit and a cost to the internationalization of financial markets?

One of the single best sources of information about financial institutions is the U.S. Flow of Funds report, produced by the Federal Reserve. This document contains data on most financial intermediaries. Go to http:// www.federalreserve.gov/releases/Z1/ and find the most current release. You may have to get Acrobat Reader if your computer does not already have it; the site has a link for a free download. Go to the Level Tables and answer the following questions.

a. What percentage of assets do commercial banks hold in loans? What percentage of assets is held in mortgage loans?

b. What percentage of assets do savings and loans hold in mortgage loans?

c. What percentage of assets do credit unions hold in mortgage loans and in consumer loans?
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