Revision 1

What are surplus units in economics?

Economic agents that have excess funds and act as lenders.

What are deficit units in economics?

Economic agents that are in deficit of funds, typically including corporations and governments.

What defines a financial asset?

A financial asset is a claim for a payment of a future sum of money and/or periodic payments.

What obligation does a financial claim carry?

An obligation on the issuer to pay interest periodically and to redeem the claim at a stated value.

What is non-intermediated financing?

When surplus units and deficit units meet informally to arrange a transaction without the intermediation of financial institutions.

What do surplus units (lenders) seek when providing loans?

They look to minimize risk, minimize cost, and ensure liquidity.

What is liquidity in the context of financial claims?

The ease of converting a financial claim into cash without a loss of capital value in a short period of time.

What do deficit units (borrowers) typically seek in funds?

They look for liabilities with low costs, longer periods, and funds available at specific dates and times.

What role do financial markets play in the economy?

They facilitate the transfer of funds from surplus units to deficit units.

What are depositary institutions?

They accept deposits from surplus units and provide credit to deficit units through loans and purchase of assets.

What are examples of non-depositary institutions?

Finance companies, mutual funds, securities firms, insurance companies, and pension funds.

Why are financial institutions regulated?

To protect the system against disruptions in the provision of financial services.

What is systemic risk?

The spread of financial problems among financial institutions and markets that could cause a collapse.

What is the brokerage function of financial intermediaries?

To match transactors and provide transactions and services, reducing transaction costs and information costs.

What is the asset transformation function of financial institutions?

The issuance of claims that are more attractive to savers compared to claims issued directly by corporations.

What is one key role of financial intermediaries regarding small savers?

Pooling the resources of small savers and providing safekeeping, accounting services, and access to payment systems.

How do financial intermediaries address information asymmetry?

By collecting and processing standardized information, reducing the costs associated with information asymmetry.

Why can financial institutions collect information at a lower cost?

Due to their relatively large size, allowing for economies of scale.