The following is an excerpt taken from a January 11, 2008, speech entitled “Monetary Policy Flexibility, Risk Management, and Financial Disruptions” by Federal Reserve Governor Frederic S. Mishkin (www.

federalreserve.gov/newsevents/speech/mishkin20080111a.htm):

Although financial markets and institutions deal with large volumes of information, some of this information is by nature asymmetric. . . . Historically, banks and other financial intermediaries have played a major role in reducing the asymmetry of information, partly because these firms tend to have long-term relationships with their clients.

The continuity of this information flow is crucial to the process of price discovery. . . . During periods of financial distress, however, information flows may be disrupted and price discovery may be impaired. As a result, such episodes tend to generate greater uncertainty.

Answer the following questions pertaining to the statement:

a. What is meant by asymmetric “information by nature”?

b. What is the problem caused by information asymmetry in financial markets?

c. How do you think banks have historically “played a major role in reducing the asymmetry of information”?

d. What is meant by “price discovery”?

e. Why is the continuity of information flow critical to the process of price discovery?