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What are the roles of financial intermediaries and loanable funds market in promoting long-run economic growth? How do financial intermediaries link saving and investment?
Financial intermediaries are financial institutions through which savers can indirectly provide funds to barrowers. The most common intermediaries are banks and mutual funds. The role of financial intermediaries in promoting long-run economic growth is to direct the resources of saver to the borrowers. Financial intermediaries can assist with increasing the
to save through developing financial products that offer ease of liquidation but provide a higher return than a savings account. The loanable funds market is the market in which those who want to save supply funds and those who want to borrow to invest demand funds. The role of the loanable funds market in promoting long-run economic growth is to provide a market where savers can deposit their funds for potential growth and future use and borrowers can go to take out loans. Financial institutions link savings and investments through stocks and bonds.
How does government borrowing crowd out investment? What is the relationship between government borrowing and budget deficits?
Crowding out is a decrease in investment that results from government borrowing. When government borrows to finance budget deficits it crowds out households and firms by increasing interest rates and shifting the supply of loanable funds to the left (decreasing demand). With higher interest rates people are less able and less likely to borrow money.
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