Select the scenario that is an example of a legal financial intermediation. Hugh alerting the IRS that Ned is cheating on his taxes Edna giving Sid $10,000 to purchase a used car Steve not paying Mary the $50,000 he owed her last Friday, as agreed, resulting in 1 Steve’s arms Lee borrowing money from the First Bank of Jackson that was deposited there by Marilyn encouraging Howard to get financial advice before purchasing a donut shop.
Select the correct definition of financial intermediation. the process of family, loved ones, and trained financial professionals confronting a person’s decisions that are self-destructive the process of learning more about financial transactions the process of an institution operating between a saver with financial assets to invest and those assets and pay a rate of return the process of family or loved ones providing you with some money to pay off your credit.
The Correct Answer and Explanation is:
Correct Scenario:
Lee borrowing money from the First Bank of Jackson that was deposited there by Marilyn.
Correct Definition:
The process of an institution operating between a saver with financial assets to invest and those assets and pay a rate of return.
Explanation:
Financial intermediation refers to the process by which financial institutions, such as banks, credit unions, and investment firms, act as intermediaries between savers and borrowers. These institutions collect funds from individuals or entities that have surplus capital (savers or depositors) and lend those funds to individuals or businesses that need capital (borrowers). This system is essential to the functioning of modern economies, as it facilitates efficient capital allocation, encourages savings, and promotes investment.
In the correct scenario, Lee is borrowing money from the First Bank of Jackson, and that money was deposited there by Marilyn. This clearly represents a case of financial intermediation. Marilyn is the saver who has deposited her funds into the bank, and Lee is the borrower using those funds through a loan facilitated by the bank. The bank plays a crucial intermediary role—ensuring Marilyn earns interest on her deposits while evaluating and managing the risk of lending to Lee. In return, the bank charges Lee interest on the loan, which is typically higher than what it pays Marilyn, profiting from the spread.
None of the other scenarios represent legal or proper financial intermediation:
- Alerting the IRS is a legal action but unrelated to finance.
- Edna giving Sid money is a private transaction, not via an institution.
- Steve not repaying Mary is a case of default or fraud.
- Encouraging financial advice is prudent but not financial intermediation.
Understanding financial intermediation is critical for recognizing how money moves within the economy and the role banks and other financial institutions play in enabling investment and economic growth.
