An article in the Wall Street Journal on the use of artificial intelligence (AI) in the financial system stated that "similar to index-tracking funds, funds managed in part by artificial intelligence require less human intervention and therefore can often cost less to run." The article also noted that banks are using AI to decrease the costs and increase the accuracy of compliance with government regulations. a. What financial intermediary do "index-tracking funds" or "funds" refer to? b. How does the use of AI affect labor productivity in the financial system? Briefly explain. c. How would the financial system's use of AI affect the rate of long-run economic growth? Briefly explain using the loanable funds model.

Step by step solution

01

Understanding Financial Intermediaries

Financial intermediaries refer to institutions that facilitate transactions between lenders (savers) and borrowers (spenders). When the exercise mentions 'index-tracking funds' or 'funds', it's referring to mutual funds. These are types of financial intermediaries.

02

AI and Labor Productivity

The use of AI can increase labor productivity in the financial sector. This can occur because AI can automate processes, reducing the time and cost associated with manual labor. For instance, AI can automate data analysis, market prediction, risk assessment, etc. In these cases, it reduces the need for human intervention, leading to cost-saving, thus improving labor productivity.

03

AI and Long-run Economic Growth

Whether the use of AI in the financial system will affect long-run economic growth can be examined using the loanable funds model. In this model, an increase in savings make more loanable funds available, which can lead to a decrease in the real interest rate, encouraging more investment. If AI helps reduce costs and improves efficiency in banks, it may lead to an increase in bank profits, potentially increasing savings. This in turn could lead to a decrease in the real interest rate, a boost in investment, and ultimately, an increase in the rate of long-run economic growth.

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