Question

AVOID PLARGISIM PLEASE !

REFRENCES REQUIRED

Q. 1. How does Financial System Coordinate Saving and Investment? Explain in detail.

Q. 2. Discuss role play by Bank in the monetary system? How do bank create money?

Q. 3. Analyze and create T-account balance sheets.

Answer 1

Financial system brings the savers and investors together. Some people in economy will be interested in saving money for future and others will be interested in borrowing money for future investments, so that they can earn more.Financial system coordinates between the savers and investors. The money saved by savers is used by investors by borrowing for their investment projects.Financial system leads to exchange of funds between lenders, investors and borrowers.Financial system bridges the gap between saving and investment. Example I deposit $1000 in bank as savings. So, bank gives me some interest on this. The same $1000 can be borrowed by someone else for investment and in return he will pay interest to the bank for utilizing the money.

Financial system consists of financial institutions to transfer funds from savers to investors.This can be further divided as

• Financial Markets
• Financial Intermediaries

Financial Markets consist of stock market and bond market. These deal in sale and purchase of securities, commodities, fungible items and bonds at a particular price thus transferring the funds between two parties. In Financial Markets savers can directly provide funds to borrowers.

Financial intermediaries include banks. Banks accept deposits from savers and lend these deposits to borrowers for investment. It acts as an intermediary between savers and investors. Investment funds are also an intermediary that links saver and investor. An investment fund is an institution that sells shares to the public and uses the proceeds to buy a portfolio, of various types of stocks, bonds, or both. Other financial intermediaries include mutual funds, insurance companies, pension funds etc.

So, in this way Financial System helps in mobilizing savings and promoting investments and thus leading to economic growth.