Topic 1 Introduction

Discussion Questions

1. Because they channel funds from those who do not have a productive use for
them (i.e. the savers) to those who do (the investors), thereby resulting in
higher economic efficiency.

2. The rise in stock prices leads to a rise in the wealth, and according to the wealth
effect, consumers would like to spend more on goods and services.

3. It makes Japanese goods and services relatively cheaper to Hong Kong products,
according to the law of demand, Hong Kong people will buy more Japanese
products and will travel more in Japan.

4. Yes, because the absence of financial markets means that funds cannot be
channeled to people who have the most productive use for them.
Entrepreneurs then cannot acquire funds to set up businesses that would help
the economy grow rapidly.

5. Because you know your family member better than a stranger, you know more
about the borrowers honesty, propensity for risk taking, and other traits. There
is less asymmetric information than with a stranger and less likelihood of an
adverse selection problem, with the result that you are more likely to lend to
the family member.

6. They might not work hard enough while you are not looking or may steal or
commit fraud.

7. True. If there are no information or transaction costs, people could make loans
to each other at no cost and would thus have no need for financial
intermediaries.