ANSWERS TO END-OF-CHAPTER QUESTIONS
1. A surplus savings uhit (SSU) is an economic unit that has an income for a given period that exceeds its expenditures. Conversely, the expenditures of a deficit savings unit (DSU) exceed its income for the period. SSUs are an economy’s ultimate investors; DSU5 are the ultimate users of funds in financial markets.
2. Financial intermediaries reduce the search and information costs that are incurred when SSUs provide financing for projects undertaken by DSU5. A financial intermediary evaluates the projects of DSUs, accepts their promises to pay in the form of a primary security, often in the form of a promissory note, and disburses funds invested by SSU5. An intermediary also is responsible to SSUs for repayment of these funds, offering SSUs a secondary security, or promise to pay by the intermediary.
3. Funds obtained by corporate DSUs are invested in the projects of the respective firms, presumably to earn satisfactory rates of return for the shareholders of that firm. These activities constitute investment activity that may ultimately increase the size of the overall economy. On the other hand, government DSUs may use the funds for non—investment or consumption purposes. When this occurs, economic growth is not necessarily enhanced.
4. The four types of financial intermediation are:
o Denomination intermediation. A number of
relatively small investments may be pooled
together to finance projects that require
large amounts of capital.
o Maturity intermediation. Deposits and other
secondary securities may have short terms to
maturity and may, in fact, be payable to the
investor upon demand, while financing made
available to DSUs has a maturity more
appropriate for the project involved
(frequently long-term).
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