Question

In: Finance

Discuss the major macro benefits of financial intermediaries. What role does the government have in the...

Discuss the major macro benefits of financial intermediaries. What role does the government have in the credit allocation process?

Solutions

Expert Solution

  • Money supply transmission: depository institutions affect the level of money supply growth in the economy. When the fed increases money availability to banks, the money supply increases but the extent of money supply growth is affected by bank’s decisions to lend the increased supply of funds. If the banks are not lending the increased money, the given increase in funds by fed can result in a change in the money supply of the economy.
  • Credit risk: the financial intermediaries generally price risk & allocate capital only to those whom they believe can generate a high rate of return to the lender for the risk that lender bears in loaning the money. The borrower’s condition is also monitored after providing the loan. A good economy must have the sound mechanisms for allocating the capital. In capitalist countries, financial intermediaries & markets allocate capital only to those users of high value thereby maximizing the economic growth. The role of government is to ensure risk disclosure & fair practices of all involved. In communist & socialist countries capital is allocated according to current political agenda & strong economic growth is rarely seen in these countries. The government cal also allocates credit to other areas like housing, farms & for development of small business etc.
  • Intergenerational wealth transfers and risk shifting: Pension funds and insurance firms allow investors to transfer wealth through time, while avoiding taxation, and/or allow investors the ability to choose which risks in their life they will bear and which they will insure.
  • Payment services: the ability of market participants to store & quickly move large sums of money at low cost & risk can encourage greater investment & also lower the overall cost of funds in the economy.

Related Solutions

Discuss at least four major macro benefits of having financial intermediaries in globalized financial markets.
Discuss at least four major macro benefits of having financial intermediaries in globalized financial markets.
outline the role of financial intermediaries and their functions in financial markets. what benefits of the...
outline the role of financial intermediaries and their functions in financial markets. what benefits of the financial system do financial intermediaries provide?
Describe the role of financial intermediaries.
Describe the role of financial intermediaries.
What crucial role do financial intermediaries perform in an economy?
What crucial role do financial intermediaries perform in an economy?
Task 1: Financial intermediaries are playing a very important role in any financial system. Critically discuss...
Task 1: Financial intermediaries are playing a very important role in any financial system. Critically discuss the function of financial intermediaries in in the financial system of a country. The discussion should include the following: Introduction with a proper overview of financial system and the financial intermediaries.  Critically discuss the types and characteristics of financial intermediaries.  Critically analyse the disadvantages of financial intermediaries.  Critically discuss the functions of financial intermediaries in the financial system.  Proper conclusion...
A bank is an example of a financial intermediary. Explain the role of financial intermediaries and...
A bank is an example of a financial intermediary. Explain the role of financial intermediaries and their usefulness to the private investor ( At least 500 words)
QUESTION 3 By using practical examples what are the role & uses of financial intermediaries with...
QUESTION 3 By using practical examples what are the role & uses of financial intermediaries with emphasis on Currency Swaps (NAD/USD) with comparative advantage argument?
what benefits for the financial system do financial intermediaries provide??( 500 words, FI.) 20 marks .
what benefits for the financial system do financial intermediaries provide??( 500 words, FI.) 20 marks .
Describe the role that financial intermediaries play in the financial markets and explain why there are...
Describe the role that financial intermediaries play in the financial markets and explain why there are so many different types of intermediaries.
Briefly discuss why it is necessary to have financial markets and financial intermediaries. (Hint: base your...
Briefly discuss why it is necessary to have financial markets and financial intermediaries. (Hint: base your answer on what we have discussed in class)
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT