Explain the various ways that financial intermediaries increase the efficiency of an economy.
What will be an ideal response?
Financial intermediaries increase an economy's efficiency in a number of ways. First, they provide a means for savers to channel funds to borrowers (spenders). This puts otherwise idle resources to use, increasing an economy's output. While savers theoretically could lend directly to borrowers, the transaction costs as well as the risk would be significantly increased, to the point where these funds may not actually flow. Also, financial intermediaries lower the transaction costs of lending. This includes information gathering as well as monitoring costs. These lower transaction costs allow resources to be used to increase the output of goods and services in the economy.
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Explain why two countries with the same average rate of inflation may not present the same inflation risk for holders of those countries' bonds?
What will be an ideal response?
A firm's choice about how much physical capital to employ differs from its choice of how much labor to employ because
a. the firm has to pay for its capital b. the productivity of labor depends on the firm's production function c. firm must compare the marginal costs and benefits of acquiring more capital d. firms do not own the labor they employ, but they frequently purchase capital outright e. labor is productive but capital is not
Economists agree that
a. neither high inflation nor moderate inflation is very costly. b. both high and moderate inflation are quite costly. c. high inflation is costly, but they disagree about the costs of moderate inflation. d. moderate inflation is as costly as high inflation.
One year before maturity, the price of a bond with a principal amount of $1,000 and a coupon rate of 5 percent paid annually fell to $981. The one-year interest rate must be:
A. 7 percent. B. 8.5 percent. C. 1.9 percent. D. 5 percent.