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ECS3701 ASSIGNMENT 2 SEMESTER 2 2024 PMT
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passmatetutorials@gmail.com ECS3701 ASSIGN 2 SEM 2 20240612521185/0717513144/0680538213
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POSSIBLE SOLUTION TO THE TASK CONSISTENT WITH THEORY OF ECS3701.
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0612521185/0717513144/0680538213
Introduction
This assignment focuses on several key macroeconomic concepts central to
understanding the global financial system, government deficit financing, and monetary
policy. The analysis covers topics such as the role of collateral and indirect finance in
shaping financial markets, how governments manage deficits through monetizing debt
and printing money, the implications of central bank independence, and the
complexities of defining the money supply. Additionally, the assignment explores the
money multiplier and its determinants, which are essential to understanding how
changes in the monetary base impact the broader money supply. Each of these topics
is analyzed within the framework of established economic theories and practical
applications.
2.01. Collateral and Indirect Finance in Explaining Financial Structure
Collateral and indirect finance are fundamental to explaining the financial structures
that operate in economies around the world.
Collateral serves as a security for loans, reducing the risk to lenders by giving them
a claim on an asset if the borrower defaults. This mechanism plays a crucial role in
lending practices, particularly for high-value transactions. According to Mishkin (2019),
collateral helps mitigate issues related to information asymmetry, such as adverse
selection and moral hazard, by aligning the interests of the lender and borrower. By
securing the loan, collateral reduces the lender’s risk, thereby making credit more
accessible and affordable for borrowers.
Indirect finance refers to the process where financial intermediaries, such as banks,
channel funds from savers to borrowers. Unlike direct finance, where borrowers issue
securities directly to investors, indirect finance relies on institutions that pool resources
from depositors and lend them out to businesses and individuals. This process is more
efficient because it reduces transaction costs and better manages risks, such as
default and liquidity risks (Mishkin, 2019). Indirect finance is particularly prominent in
economies where businesses rely heavily on banks rather than capital markets for
external financing.
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