Chapter 15, Problem 8P

To determine

Concept introduction:

Financial Intermediation- The productive economic activity in the financial market whereby an institutional unit engages in financial transactions in the market to acquire financial assets and in the process incurs liabilities in its own account. Transaction costs and economies of large scale, asymmetric information types like adverse selection (hidden information) and Moral Hazard (hidden action) are the rationales of financial intermediation.

Financial Intermediaries- The entity facilitating financial transactions to address the issue like lowering the transactions costs, facilitating portfolio diversification, asymmetry of information between the channelizing funds from the lenders to the borrowers and investor and beneficiary is the financial intermediary. Banks, insurance companies, investment banks, stock exchanges are examples of financial intermediaries.