lect 2

• Financial markets and institutions help minimize the costs associated with non-intermediated financing
• Organized financial markets completely eliminate transaction costs and information asymmetries.

  False
• What two factors are used to measure transaction costs?

  Time and money
• Financial institutions reduce transaction costs by exploiting economies of scale
• What do the letters in the image spell?

  CO

  
• How do financial institutions exploit economies of scope to reduce transaction costs?

  Joint supply of services
• Pooling assets by financial intermediaries reduces risk for individual investors.


  True
• What is adverse selection in financial transactions caused by?

  Hidden information
• Moral hazard occurs after parties agree on the terms of a transaction.


  True
• The "Lemon Problem" in information asymmetry was discussed by Akerlof
• What are three actions less informed parties can take to avoid adverse selection?

  Screening, warranty, co-investment
• Steps taken by banks to avoid moral hazard

  1️⃣ Regular monitoring of borrowers

  2️⃣ Imposing covenants on loan usage
• Too-big-to-fail banks are incentivized to take on riskier projects because of implicit government guarantees.


  True
• What is an example of a principal-agent relationship in finance?

  Bank and depositors