Monday, April 20, 2009

the Financial System and the economy(2)

The three groups of potential savers and borrowers in an economy are households,businesses,and governments. The financial system transfers savers,funds to borrowers and provides savers with payments for the use of their funds. The financial system accomplishes this transfer by creating IOUs known as financial instruments,which are assets for savers and liabilities for (claims on)borrowers. An example of a financial instrument is a car loan,which is a liability for you-you owe the bank money -and an asset for the bank-it owns the right to receive future payments from you.
As an individual saver,you could seek out potential borrowers yourself,but that would be cumbersome and costly. Instead, the financial system acts as your go-between.Funds can be transferred between savers and borrowers in several ways. One option is for the government to allocate funds among the sectors of the economy. The recent experiences of Eastern Europe and the former Soviet Union demonstrated the folly of this approach. In the U.S. economy and other industrial economies,private networks in the financial system generally bring savers and borrowers together .

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