What exists to help reduce the information costs of screening and monitoring borrowers?

The correct choice is focused on financial instruments because they play a crucial role in facilitating the lending process while helping reduce the information costs associated with screening and monitoring borrowers. Financial instruments, such as loans, bonds, and mortgages, come with standardized terms and conditions which allow lenders to better assess the risks associated with different borrowers. These standardized features help lenders gather relevant information about borrowers' creditworthiness, making it easier to predict their likelihood of repayment.

Additionally, financial instruments can include covenants or stipulations that provide lenders with ongoing oversight of the borrower's financial status. This creates a system of accountability where borrowers are motivated to adhere to the terms of the agreement to avoid penalties or automatic adjustments. Consequently, these instruments serve to mitigate the risks and costs involved in lending, thereby creating efficiencies in the lending market.

Understanding the role of financial instruments is essential, as they are fundamental tools that enable economic transactions to take place with reduced friction, ultimately fostering better financial intermediation and contributing to overall financial stability.