chapter 1

Question 1

information costs

Answer 1

The aggregation of funds in an FI provides greater incentive to collect information about customers (such as corporations) and to monitor their actions. The relatively large size of the FI allows this collec- tion of information to be accomplished at a lower average cost (so-called economies of scale) than would be the case for individuals.

Question 2

Liquidity and price risk

Answer 2

FIs provide financial claims to household savers with superior liquidity attributes and with lower price risk.

Question 3

Transaction cost services

Answer 3

Similar to economies of scale in information production costs, an FI’s size can result in economies of scale in transaction costs

Question 4

Maturity intermediation:

Answer 4

FIs can better bear the risk of mismatching the maturities of their assets and liabilities.

Question 5

Transmission of monetary supply:

Answer 5

Depository institutions are the conduit through which monetary policy actions by the country’s central bank (the Federal Reserve) impact the rest of the financial system and the economy.