Question 1: “The role of the financial system in a market economy is to effectively and efficiently move funds from surplus budget units to deficit budget units.” “However, in the absence of well functioning financial intermediaries this transfer of funds may be severely retarded.” Discuss.
A financial system can be defined The complex of institutions, including especially banks and the government and international institutions that regulate them, that facilitate payments and link lenders with borrowers and investors with the assets they invest in. Increasingly, separate national financial systems have become integrated to form a global financial system. Therefore it can be said that “The role of the financial system in a market economy is to effectively and efficiently move funds from surplus budget units to deficit budget units.” However the other statement “in the absence of well functioning financial intermediaries this transfer of funds may be severely retarded” is also is some ways true. Financial intermediation consists of channeling funds between surplus and deficit agents. A financial intermediary is a financial institution that connects surplus and deficit agents. An example of a financial intermediary is a bank that transforms bank deposits into bank loans, through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. In the absence of a well functioning financial intermediaries transfer of funds may be severely retarded if the market economy depends mainly on it intermediaries to perform the task at hand which is evident in this case. Without well functioning financial intermediaries, these institutions would not be able provide important advantages to savers. First, lending through an intermediary is usually less risky than lending directly. Therefore if the system is not functioning well the risk will increase and the financial intermediary will not be able to diversify....
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