Describe two ways in which financial intermediaries help
Course:- Microeconomics
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1. Describe two ways in which financial intermediaries help lower transaction costs in an economy.

2. How can asymmetric information problems lead to a bank panic?

3. How does the free-rider problem aggravate adverse selection problems in financial markets?

4. How can the existence of asymmetric information provide a rationale for government regulation of financial markets?

5. Raul lives in Badostan, a country with a relatively inefficient legal and financial system. When he applied for a mortgage, he found that banks usually required collateral for up to 400% of the amount of the loan. Explain why banks might require that much collateral in such a financial system. Comment on the consequences of such a system for economic growth.

6. The bank you own has the following balance sheet:

Assets ($M)

Liabilities ($M)







Bank capital


If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions should you take? Show using a revised balance sheet.

7. If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to lend out? Why or why not? What options are available that will enable you to provide the funds your customer needs?

8. If the president of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy stock in that bank? Why or why not?

9. Freedom Cheney Bank started its first day of operations with $10 million in capital. A total of $100 million in checkable deposits is received. The bank makes a $20 million commercial loan and lends another $30 million in mortgage loans. If required reserves are 5%, what does the bank balance sheet look like?

10. You are manager of Eagle First, a bank with $50 million of fixed-rate assetsat 4%, $20 million of rate-sensitive assets at 6%, $50 million of fixed-rate liabilities at 3%, and $50 million of rate-sensitive liabilities at 4%. Conduct a gap analysis for the bank, and show what will happen to bank profits if interest rates rise by 2 percentage points. What actions could you take to reduce the bank's interest-rate risk?

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