Question

Select the scenario that is an example of a legal financial intermediation.

a. Lee borrowing money from the First Bank of Jackson that was deposited there by Lisa

b. Hugh alerting the IRS that Ned is cheating on his taxes

c. Edna giving Sid $10,000 to purchase a used car

d. Steve not paying Mary the $50,000 he owed her last Friday, as agreed, resulting in Mary's partners breaking both of Steve's arms

e. Marilyn encouraging Howard to get financial advice before purchasing a donut shop

Select the correct definition of financial intermediation.

a. the process of an institution operating between a saver with financial assets to invest and an entity who will receive those assets and pay a rate of return

b. the process of family, loved ones, and trained financial professionals confronting a person about how their financial decisions are self destructive

c. the process of learning more about financial transactions

d. the process of family or loved ones providing you with some money to pay off your credit card bills

Answer 1

1) Solution: Lee borrowing money from the First Bank of Jackson that was deposited there by Lisa

Explanation: The legal financial intermediation occurs when there is flow of funds to the borrowers through financial intermediaries such as banks. Financial intermediaries are institutions who hold funds from lenders to advance loans to borrowers thus act as a middle man.

2) Solution: the process of an institution operating between a saver with financial assets to invest and an entity who will receive those assets and pay a rate of return

Explanation: Financial intermediaries are institutions who hold funds from lenders to advance loans to borrowers thus act as a middle man. Financial intermediaries have their existence because there are substantial information and transactions costs in the economy. They are involved in the process of indirect finance and at improving the lot of the small saver