Question

2. Determine whether the sentences are True Or False                                 (5marks)

1. Stabilizing the economy is the primary function of Commercial banks ( -------------- )
2. The Credit creation activity can raise aggregate demand which leads to more production in the economy ( -------------- )
3. Risk aversion is the difference between the return on a risky asset and less risky asset, which serves as compensation for investors to hold riskier securities ( -------------- )
4. The transfer of risk occurs in the capital markets ( -------------- )
5. The tighter the probability distributions of expected future returns, the higher the risk of a given investment (-------------- ).

Answer 1

1. Stabilizing the economy is the primary function of commercial banks- False

- Primary function of commercial banks are accepting and lending funds

2. The credit creation activity can raise aggregate demand which leads to more production in the economy-True

Boosting aggregate demand will also boost the production and boost the size of economy consequently.

3.Risk aversion is the difference between the return on a risky asset and less risky asset which serves as compensation for investors to hold riskier securities-True

Risk aversion assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities....The difference between the return on a risky asset and a riskless asset , which serves as compensation for investors to hold riskier Securities.

4. The transfer of risk occurs in the capital markets- True

5. The tighter the probability distributions of expected future returns, the higher the risk of a given investment- False

The tighter the probability distributions of expected future returns, the smaller the risk of a given investment.