19. Financial intermediaries exist because small investors cannot efficiently ________.
A) diversify their portfolios
B) gather all relevant information
C) assess credit risk of borrowers
D) advertise for needed investments
E) all of the above.
Answer: E Difficulty: Easy
Rationale: The individual investor cannot efficiently and effectively perform any of the tasks above without more time and knowledge than that available to most individual investors.
20. Firms that specialize in helping companies raise capital by selling securities are called ________.
A) commercial banks
B) investment banks
C) savings banks
D) credit unions
E) all of the above.
Answer: B Difficulty: Easy
Rationale: An important role of investment banks is to act as middlemen in helping firms place new issues in the market.
21. Financial assets ______.
A) directly contribute to the country’s productive capacity
B) indirectly contribute to the country’s productive capacity
C) contribute to the country’s productive capacity both directly and indirectly
D) do not contribute to the country’s productive capacity either directly or indirectly
E) are of no value to anyone
Answer: B Difficulty: Easy
Rationale: Financial assets indirectly contribute to the country’s productive capacity because these assets permit individuals to invest in firms and governments. This in turn allows firms and governments to increase productive capacity.
The correct answer and explanation is:
Answer: B) indirectly contribute to the country’s productive capacity
Explanation:
Financial assets play a crucial role in economic growth, but they do so indirectly rather than directly. Unlike physical assets such as machinery, buildings, or land that directly impact production, financial assets like stocks, bonds, and bank deposits facilitate investment, which in turn fuels economic expansion.
- Channeling Funds to Productive Uses:
Financial assets enable the efficient allocation of capital by directing savings to businesses and governments that need funds for expansion and development. For example, when an investor buys shares in a company, the company can use the funds to build factories, hire employees, and enhance production capacity. - Encouraging Investment and Innovation:
Companies often rely on financial markets to raise capital through stock and bond issuance. This access to funding allows them to invest in research, development, and infrastructure, leading to economic growth and technological advancement. - Providing Liquidity and Reducing Risk:
Financial markets make it easier for investors to buy and sell financial assets, increasing liquidity and reducing risk. Investors are more willing to commit their funds to businesses when they know they can exit their investments when needed. - Enhancing Efficiency in the Economy:
Financial assets facilitate risk-sharing and diversification. By spreading investments across different assets, investors can reduce their risk exposure, leading to a more stable financial system. A well-functioning financial system ensures that capital is allocated to the most productive ventures.
In conclusion, while financial assets do not directly increase the country’s productive capacity like physical assets, they are vital in ensuring that resources flow to the most efficient and innovative enterprises, thereby indirectly contributing to economic growth.