Which function of a financial intermediary reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings?

Question

BlackTom AI · Accepted Answer

To tackle the question, I’ll evaluate what each function of a financial intermediary does and how it relates to reducing costs between a corporation and individual savers.
Option a: Administration of the payments mechanism. While mediating payments is important and can reduce some friction, it primarily handles facilitating transactions and settlement rather than directly reducing information or transaction costs associated with saving decisions. This function is more about payment flow than about lowering the broader costs of saving.
Option b: Brokerage services. Brokerage focuses on matching buyers and sellers and providing liquidity. Although it reduces search costs for some asset trades, its primary role is not the production of information or the lowering of information asymmetries that influence saving rates; it’s more about execution and liquidity.
Option c: Asset transformation services. This involves transforming assets to match investor needs (for example, turning illiquid term loans into liquid securities). While this reduces certain transaction frictions, it does not address the information costs directly tied to savers’ understanding of savings opportunities across the economy. Its main impact is on risk diversification and liquidity transformation, not information production.
Option d: Information production services. This is the core function that lowers information costs between savers and borrowers. By producing and disseminating reliable information about creditworthiness, project viability, and returns, intermediaries reduce the asymmetry and search costs that would otherwise deter saving. This can encourage a higher rate of savings because individuals feel more confident about where to place funds and the expected risk-adjusted returns.
Option e: Money supply management. Central bank–like activities or broad monetary policy influences the overall level of money in the economy, but it does not directly address the micro-level information and transaction costs between a corporation and individual savers. Its effects are macroeconomic rather than the specific intermediary function described in the question.
In summary, the option that most directly reduces both transaction and information costs by producing relevant, reliable information for savers is option d, information production services, since it tackles the core informational frictions that influence saving decisions. The other options either address different intermediary functions or do not target information costs in the same targeted way, making them less aligned with the question’s focus on encouraging a higher rate of savings through cost reduction.

BFF2401 - S2 2025 Moodle Exercise 1

Which function of a financial intermediary reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings?

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BFF2401 - S2 2025 Moodle Exercise 1

Which function of a financial intermediary reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings?

View Explanation

Log in for full answers

Similar Questions

Financial intermediaries are[Fill in the blank]

Part 1Which of the following is not an important financial intermediary in the​ economy? A. Commercial banks. B. Mutual funds. C. The Fed. D. Finance companies.

Part 1 Financial intermediaries LOADING... have a role to play in matching savers and borrowers for all of the following reasons except​:Part 2 A. economies of scale B. risk sharing C. information symmetries D. minimising transaction costs

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Which of the following statements is FALSE?

Which of the following is NOT a major function of financial intermediaries?

Which of the following is NOT a reason for the specialness of financial intermediaries?

Banks a. play no role in the financial system. b. are financial intermediaries c. are financial markets, as are bond markets. d. All of the above are correct.

More Practical Tools for Students Powered by AI Study Helper

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Part 1Which of the following is not an important financial intermediary in the economy? A. Commercial banks. B. Mutual funds. C. The Fed. D. Finance companies.

Part 1 Financial intermediaries LOADING... have a role to play in matching savers and borrowers for all of the following reasons except:Part 2 A. economies of scale B. risk sharing C. information symmetries D. minimising transaction costs

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