Examples of imperfections in the financial system which allow banks to exist include which of the following?
A)Informational asymmetry
B)Efficiency of markets
C)Divisibility of assets
D)Adequate liquidity
E)All of the examples are of the imperfections that exist.

Question

Quizplus · Accepted Answer

Informational asymmetry is an imperfection that exists in the financial system, and it allows banks to exist. Banks have more information about borrowers' creditworthiness and the risk of lending money than individual investors, and they use this advantage to make a profit by lending money at a higher interest rate than they pay to depositors. This creates a profit margin for banks while providing a service to borrowers who would not be able to borrow money from individual investors due to the informational asymmetry.

The other choices (B, C, D, and E) are not imperfections in the financial system that allow banks to exist. Efficiency of markets, divisibility of assets, and adequate liquidity are all important aspects of a functioning financial system, but they do not create an advantage for banks over individual investors. The answer is only A.

Examples of Imperfections in the Financial System Which Allow Banks