Financial Intermediation Case Study

1. Explain the statement, “A financial claim is someone’s asset and someone else’s liability”?

Is where two debt accounts for both parties, the issuer debt for a debt instrument considered as a liability. For the owner for this debt is considered as an asset of his

2. Explain concept of financial intermediation. How does the possibility of financial intermediation increase the efficiency of the financial systems?

Financial intermediation is the process by which financial institutions mediate unmatched preferences of borrowers which are Deficit Units and lenders which are Surplus Unit.

The Financial intermediaries buy financial claim from a deficit unit and issue the liability to different Surplus Unit, it increases amount of participants

Why are economies of scale important to the viability and profitability of financial intermediaries?

Economies of scale give financial intermediaries a cost advantage over households, governments, and business firms in providing financial services. If their average cost decreases as the size of the transaction increases, financial intermediaries can profitably engage in denomination intermediation.

5. Explain the differences between the money markets and the capital markets. Which market would General Motors use to finance a new vehicle assembly plant? Why?

Money markets are markets for liquidity with a maturity for one year or less. Money markets tend to be wholesale over the counter markets made by dealers which have a maturity of 1 year or more. Capital markets are where real assets are permanently financed

GM would finance its new plant by issuing bonds or stock in the capital market. Investors would purchase those securities to build wealth over the long term, not to store liquidity. Also, it would finance its loan receivables both in the money market and in the capital market. GM would use the money market to “store” cash in money market securities, which are generally, safe, liquid, and

What do we mean by “off-balance-sheet” activities? If these things are not on the balance sheet, are they important? What are some off-balance-sheet activities?

An asset, debt or financing activity is not on the company 's balance sheet. It is necessary to manage the risks of these activities. For example credit risk is the most important risk to manage. Some of the activities in the off-balance-sheet are fees, loan sales, and derivatives trading help banks to manage their interest rate risk

8. What is the essential difference between the Keynesian and the monetarist view of how money affects the economy?

Monetarists assumed that velocity is relatively constant, so that controlling M1 is the essential factor in influencing the non-inflationary output of the economy.

Keynesians assumed that velocity is a variable so that changes in the money supply often affect only the financial sector (interest rates) and not necessarily the real sector of spending and investments. Investment spending is related to the expected rate of return on investments relative to the level of interest rates.

The neo-Keynesians have a short-run view of the world. The quantity theorists take a long-run