Chapter 8, Problem 3Q

To determine

The ways in which the financial intermediaries can reduce the transaction costs

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 issues like lowering the transactions costs, facilitating portfolio diversification, asymmetry of information between the channelizing funds from the lenders to the borrowers and investors and beneficiaries is the financial intermediary. Banks, insurance companies, investment banks, and stock exchanges are examples of financial intermediaries.