Financial institutions indirectly increase economic growth because:

Question

BlackTom AI · Accepted Answer

The question asks about how financial institutions indirectly support economic growth. We will evaluate each option in turn.
Option 1: 'All of the below.' This choice asserts that every listed mechanism contributes to growth, so we must assess the rest to see if they collectively cover the full picture.
Option 2: 'They reduce information and monitoring cost.' Financial intermediaries gather and process information about borrowers and projects, lowering search and monitoring costs for lenders. This facilitates lending to productive activities that might otherwise be underfunded due to information frictions.
Option 3: 'They decrease the risk of investments.' Through diversification across many borrowers and assets, financial institutions can reduce idiosyncratic risk for investors. They also provide instruments, risk management services, and access to hedging that can lower overall investment risk.
Option 4: 'They increase the flow of funds.' By channeling funds from savers to borrowers, financial institutions improve capital allocation, ensuring funds reach productive investments more efficiently, which supports growth.
Putting these together, each of the latter options describes a pathway by which financial intermediaries can support economic activity: reducing information costs, lowering investment risk via diversification and risk management, and boosting the availability and flow of funds. Since all of these mechanisms operate in tandem to promote growth, the first option encapsulates the combined effect.
In summary, evaluating the individual claims shows that each contributes to economic growth, and their coexistence explains why the comprehensive option aligns with the concept of indirect growth support by financial institutions.

25751 Financial Institution Management - Spring 2025 Week 2 Quiz

Financial institutions indirectly increase economic growth because:

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