Essay
ECS3701 ASSESSMENT 2 2023 SEMESTER 2
- Course
- Monetary Economics (ECS3701)
- Institution
- University Of South Africa (Unisa)
ECS3701 ASSESSMENT 2 2023 SEMESTER 2
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PASSMATE TUTORIALS passmatetutorials@gmail.comDISCLAIMER: THIS IS NOT AN OFFICIAL GUIDE FROM UNISA. THE FRAMEWORK
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2.01 Explain how financial intermediaries reduce transaction costs thereby
allowing small savers and borrowers to benefit from the existence of financial
markets. [10]
Transaction costs, the time and money spent in carrying out financial transactions, are
a major problem for people who have excess funds to lend. However, financial
intermediaries can substantially reduce transaction costs because they have
developed expertise in lowering them and because their large size allows them to take
advantage of economies of scale, the reduction in transaction costs per dollar of
transactions as the size (scale) of transactions increases. Financial intermediaries can
reduce transaction costs through various means and the specific strategies employed
may vary depending on the nature of the financial intermediary and the market in which
it operates.
One of the primary ways is by exploiting economies of scale. By consolidating the
investments of multiple individuals, financial intermediaries can achieve lower costs per
rand of investment. For example, if 100 investors each with R10,000 were to buy
R1,000,000 of bonds together, they would face lower costs per rand compared to if
they were to buy separately.
Transaction costs are the costs associated with finding a lender or a borrower for this
money. Thus, banks lower transactions costs and act as financial intermediaries—they
bring savers and borrowers together. Along with making transactions much safer and
easier, banks also play a key role in the creation of money.
Those who want to borrow money can go directly to a bank rather than trying to find
someone to lend them cash Transaction costs are the costs associated with finding a
lender or a borrower for this money. Thus, banks lower transactions costs and act as
financial intermediaries—they bring savers and borrowers together.
Another way financial intermediaries reduce transaction costs is by offering
standardized terms on which they are prepared to do business. This reduces the total
number of transactions required and provides a more efficient process for borrowers
and lenders.
PASSMATE TUTORIALS 061 262 1185/068 053 8213/0717 513 144
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