Question

The state of Georgia is considering the construction of a high-speed rail system to alleviate traffic congestion, especially across the Atlanta Metropolis at a cost of $45 billion. Some of the funding will come from the Deutsche Bank financial institution, while most of it will be through the issuance of state bonds, with the rest financed by private investors who will own shares in the rail system. Explain how financial intermediation is necessary to make this project a reality. Why couldn’t the state use the tax revenues it collects during the current year to pay for it?

Answer 1

If all the amount collected by the state in the form of tax is invested in this construction activity then the amount would be blocked in one activity, and thereby affect the spending capacity of the government in the coming year.Even important matters would not be taken care of in such a situation, as the government will not be able to finance it. Hence, for a smooth functioning of the economy, the government must procure finance through lending institutions, so that it doesn't have to face a burden unnecessarily and also its one of the activities of the financial institutions to bridge the gap between the lender and the borrower.