Question

Describe the process of financial intermediation and what role the Bank of Canada and the Federal Reserve play in that process. How do firms borrow and lend, and how do the central banks help facilitate that process?

Answer 1

Financial intermediation refers to the act of connecting or bringing together borrowers and lenders so that those in excess of capital and lend money to those in need of it.

Bank of Canada and Federal Reserve play an important role in this regard. They collect money from banks with excess capital and reserves and lend it to other commercial banks or countries.

This helps them make money as a middlemen.

Bank of Canada and Federal Reserve help facilitate this process by acting as a common meeting ground for such borrowers and lenders and giving own gaurantee for safety of funds.