how differences in financial systems affect macroeconomic outcomes. Thereby the direct control of financial institutions by business houses has been eliminated. savings and channelize … Financial system in today’s world is perhaps the most important system among all the systems as all the economics of the world have become interlinked it has become a very complex system. Corporate equities serve as a hedge against inflation. Therefore, the more rapid growth of real national income, the greater will be the demand by enterprises for external funds (the savings of others) and therefore financial intermediation. The cost of moving money through time, or the equilibrium interest rate, is the rate at which aggregate supply for funds through savings equals aggregate demand. As far as credit function is concerned i have already mentioned it in the point number 2 and about other points, they all are functions of financial system. The financial system affects capital accumulation either by altering the savings rate or by reallocating savings among different capital producing levels. Thus, well-developed financial systems channel financial resources to their most productive use. Pooling of Funds. Efficient capital allocation allows the market’s scarce capital to be allocated to only the most productive investments. Savers require stores of value to hold their savings in. marketbased systems. Well-informed investors will not make a loan to someone with poor credit without being appropriately compensated with a higher rate of return, nor will they invest in projects unless the value of future cash flows exceeds the cost. You believe that ABC’s stock is currently undervalued due to an overreaction of the market to the earnings announcement. Serving this function are intermediaries like banks involved in financing corporate investments and housing, insurance companies and pension funds in financing corporate investments and paying retirement annuities, and mutual funds. management of risk. (i) Link of financial development and real sectors of the economy. 4. The public sector comprises central and state governments, departmental and non-departmental undertakings, the RBI, etc. Close this message to accept cookies or find out how to manage your cookie settings. Financial development and household expenditure are highly correlated, as discussed in Claessens and Feijen (2006). It will porduce more efficiently and effectively when it has enough fund. An important question is how differences in financial systems affect macroeconomic outcomes. The financial system can work to the detriment of savers in a variety of ways. When the public buys primary securities, it makes its surpluses available directly to deficit spenders. This is not an example of the work produced by our Essay Writing Service. It facilitates the efficient allocation of risk-bearing. There is a comparable service offered to investors (and producers) to induce them to absorb the savings the system generates. This helps in the maximum utilisation of savings. organisation who needs fund to operate its business smoothly, government in order to undertake big project, individual to fulfill personal need etc. Shortage of any kind of capital with any firm can hurt badly its productive activity and growth. What the financial system does is to break the straight jacket of internal finance (or balanced budget).

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