The financial system and the macroeconomy

Question 1

what is the financial system?

Answer 1

the institutions in an economy that allow funds to be transferred between savers and investors

savers are households with money they don’t need to spend immediately

investors are households and firms that need money for investments or purchases

the financial system allows those who are willing and able but without funds to borrow from those with funds but no ability

it also allows investors to reduce their risk of their investments failing by sharing the risk with the savers who provide the funds. In turn, savers are able to reduce their risk by diversifying their assets

Question 2

components of the financial system

Answer 2

financial markets and financial intermediaries

financial markets involve money being transferred directly between savers and investors

financial intermediaries (such as banks) are things through which money is transferred between savers and investors indirectly

Question 3

why do we need intermediaries

Answer 3

There is often asymmetric information between savers and investors, as investors know more about the likelihood of their investment failing than savers do.
when there is asymmetric information, a financial intermediary may be needed to make sure important information is not being withheld and the savers are not being taken advantage of.

it does this through:
screening investors (to see whether or not they're trustworthy) before the money is lent to them and monitoring how investors spend the money 

without intermediaries, start-up businesses would find it really hard to get funding

however, in recent years, people have started to monitor and screen investors online