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Financial systems are usually perform the essential economic function of channeling funds from lander-saver (who have saved surplus funds) to borrower-spenders (who have a shortage of funds). The most important lender-savers are households and typical borrower-spenders are firms and the government.
The channeling of funds from savers to spenders is very important for two reasons
• First, lender-savers (with excess of available funds) do not have profitable investment opportunities while borrower-spenders
have investment opportunities but they have lack of funds.
• Second, even for purposes other than investment opportunities in businesses, borrower-spenders may want to invest in excess of their current income or to adjust the composition of their wealth (reconciliation of the preferences for current versus future consumption).
In direct finance, borrower-spenders borrow funds directly from lenders in the financial markets by selling securities. In indirect finance, a financial intermediary stands between the lender-savers and the borrower-spenders: the intermediary helps to transfer funds from one to the other. This suggests that financial markets and intermediaries are alternatives that perform more or less the same function but in different ways (and perhaps with different degrees of success).
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4 Comments. Leave new
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