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Econ Notes

Stack #217159

QuestionAnswer
what is the purpose of Financial Intermediaries To bring borrowers and savers together
Name the 4 types of Financial Intermediary institutions Depository, Investment, Contractual saving, Governmental financial.
Why do we have Financial Intermediaries? They reduce transaction and information costs, and they provide services of liquidity, risk sharing, and information
What two things can Financial intermediaries reduce? Transaction and information costs
Explain Adverse Selection. the difficulty in distinguishing good from bad borrower's "lemon problem"
Explain Moral Hazard. Difficulty in monitoring that a borrower uses funds as intended.
How can Financial intermediaries get around adverse selection? check credit score, check employment, ask for collateral
How can Financial intermediaries get around moral hazard? Loan covenants, corporate boards
What are Assets? The uses of funds
What is a Liability? The sources of funds
what is the equation to figure out your net worth? NET WORTH= ASSETS-LIABILITIES
On a balance sheet, what goes in the "Assets" column? Loans, gov't securities, reserves
On a balance sheet, what goes in the "liabilities" column? checkable deposits, non-transaction deposits(savings), borrowings, Equity Capital
why do banks have reserves? So the depositors can withdraw
how much must a bank hold for the required reserves? 10%
what is a "bank run"? too many depositors want their money and the bank runs out of reserves
what is the purpose of the FDIC? insures the deposits of member banks up to a certain level per depositors per account. also to prevent bank runs.
what is a T-account? it shows changes in a balance sheet during a particular time period.
Created by: eman4226
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