What is the role of the financial system? Name and describe two markets that are part of the
financial system in the U.S. economy. Name and describe two financial intermediaries. What is
the difference between savings and investment (according to economists) and what role does the
financial system serve in bridging the gap between savings and investment? Explain why a
person would want to invest in stocks and bonds rather than keep their money in a savings
account.? ( 200 words)
Solution
Ans.
The financial system is concerned about credit, money and finance. It is a set of complex and
inter-mixed financial institutions ,financial markets, financial instruments and services.It is a
system that enables lenders and borrowers to exchange funds.It serves as a link between savers
and investors.Financial system promotes the process of capital formation and is a mechanism of
transfer of resources.Such as it channelise savings into business sector by offering loans.
Most important financial market is bonds market.In this market bond is like a contract paper with
maturity date and rate at which it is paid back to buyers.The money that companies get from
bonds can be further used for making profitable projects.When bond matures it is paid back to
purchaser with interest. The other market is of stocks market where stocks are issued by selling
shares to the public and trading is done with stockholders in stock exchange.It has higher returns
than bonds.
The two financial intermediaries are banks and mutual funds.Where banks are the financial
institutions that receives deposits and make loans.They pay interest on their deposits and charge
borrowers higher interst rate on their loans.Mutual funds are investment that uses money from
many investors to invest in bonds and stocks.
Savings are part of disposable income that is left after consumption of goods and
accumulated.Whereas investment means addition to stock of capital goods that adds to the future
productive capacity of the economy. Financial system is an important vehicle for economic
transformation.It bridges the gap between savings and investment through efficient mobilization
and allocation of surplus funds.It facilitates flow of funds from areas of surplus to deficit.
The money in savings account cannot be sold or traded to other investors such that they are not
negotiable, Whereas bonds are sold by investors to other investors before bonds reach there
maturity date.Money in savings account offers less return than bonds but bonds offer higher
returns which are considered as safe investment when borrowed from goverenment .so its better
to invest in stocks and bonds rather than keeping money in savings account..
What is the role of the financial system Name and describe two mark.pdf
1. What is the role of the financial system? Name and describe two markets that are part of the
financial system in the U.S. economy. Name and describe two financial intermediaries. What is
the difference between savings and investment (according to economists) and what role does the
financial system serve in bridging the gap between savings and investment? Explain why a
person would want to invest in stocks and bonds rather than keep their money in a savings
account.? ( 200 words)
Solution
Ans.
The financial system is concerned about credit, money and finance. It is a set of complex and
inter-mixed financial institutions ,financial markets, financial instruments and services.It is a
system that enables lenders and borrowers to exchange funds.It serves as a link between savers
and investors.Financial system promotes the process of capital formation and is a mechanism of
transfer of resources.Such as it channelise savings into business sector by offering loans.
Most important financial market is bonds market.In this market bond is like a contract paper with
maturity date and rate at which it is paid back to buyers.The money that companies get from
bonds can be further used for making profitable projects.When bond matures it is paid back to
purchaser with interest. The other market is of stocks market where stocks are issued by selling
shares to the public and trading is done with stockholders in stock exchange.It has higher returns
than bonds.
The two financial intermediaries are banks and mutual funds.Where banks are the financial
institutions that receives deposits and make loans.They pay interest on their deposits and charge
borrowers higher interst rate on their loans.Mutual funds are investment that uses money from
many investors to invest in bonds and stocks.
Savings are part of disposable income that is left after consumption of goods and
accumulated.Whereas investment means addition to stock of capital goods that adds to the future
productive capacity of the economy. Financial system is an important vehicle for economic
transformation.It bridges the gap between savings and investment through efficient mobilization
and allocation of surplus funds.It facilitates flow of funds from areas of surplus to deficit.
The money in savings account cannot be sold or traded to other investors such that they are not
negotiable, Whereas bonds are sold by investors to other investors before bonds reach there
maturity date.Money in savings account offers less return than bonds but bonds offer higher
returns which are considered as safe investment when borrowed from goverenment .so its better
to invest in stocks and bonds rather than keeping money in savings account.
