Chapter 26, Problem 1QR

To determine

The role of a financial system and the different financial markets and intermediaries.

Explanation of Solution

The system that allows the exchange of funds between the different sectors of the economy such as the lenders and the borrowers, lenders and the investors in the most possible form of the money, credit or the finance are known as the financial system. The financial system will operate under various levels in the economy such as the national levels and global levels etc. The main role of the financial system is to provide a matching between the savings of the one who have excess money to the demand of the one who makes an investment. Thus, the savings of someone will be matched with another person's investment under the financial system. There are two markets that are part of the financial system and they are Stock markets and the Bond markets.

The stock markets are the markets that exchange the stocks in order to raise the capital for the investment purpose. The stock is the share of the firm and the stock provides the share of the ownership right to the one who holds it. The large corporate uses this sale of shares in order to raise the investment capital. The stocks provide the stockholders the share of the firm's profit and thus, they are known as the shareholders of the firm. The Bonds on the other hand is the certificate of indebtedness which guarantees the repayment of the loan amount after the maturity of the Bond and the payment of interest on the loan amount. The large corporations, federal government or other state or local governments uses to borrow with the help of the Bonds. The bonds provide interest to the bond holders.

The two different financial intermediaries are the banks and the Mutual funds. The bank accepts the deposits from the public and uses the deposits to create credit in the economy and to provide the loans to the borrowers. The Mutual funds sells the shares to the general public and uses the proceeds to buy a portfolio of financial assets.

Economics Concept Introduction

Concept introduction:

Financial system: The financial system is a system that allows the exchange of the funds between the lenders, investors and the borrowers through the medium of money, credit and finance etc.