The Economics of Money, Banking, and Financial Markets,
An Overview of the Financial System
Yes, I should take out the loan, because I will be better off as a result of doing so. My interest
payment will be $4,500 (90% of $5,000), but as a result, I will earn an additional $10,000, so I will
be ahead of the game by $5,500. Since Larry’s loan-sharking business can make some people better
off, as in this example, loan sharking may have social benefits. (One argument against legalizing
loan sharking, however, is that it is frequently a violent activity.)
The principal debt instruments used were foreign bonds which were sold in Britain and denominated
in pounds. The British gained because they were able to earn higher interest rates as a result of
lending to Americans, while the Americans gained because they now had access to capital to start up
profitable businesses such as railroads.
You would rather hold bonds, because bondholders are paid off before equity holders, who are the
They might not work hard enough while you are not looking or may steal or commit fraud.
True. If there are no information or transactions costs, people could make loans to each other at no
cost and would thus have no need for financial intermediaries.
A ranking from most liquid to least liquid is (a), (b), (c), and (d). The ranking is similar for the most
safe to the least safe.