Question

a. What are the four types of agents involved in demand and supply of capital in the financial environment? Which of these agents are the net users of capital and which ones are net savers?

b. Can the net savers in the U.S. economy ever be users and if so, provide an example when this may occur? When does the U.S. government become a net user of capital and what does it use this capital for?

c. Identify three ways that capital is transferred between savers (providers, suppliers) and users (borrowers, demanders). Explain each channel briefly. Discuss at least one advantage and one disadvantage of each channel.

Answer 1

Ans( a).

The four types of agents involved in demand and supply of capital in the financial environment are :

1. Banks

Banks are the financial intermediary which simplify the lending and borrowing process apart from providing various other services to customers.

2. Financial Brokers

These act as a agent between the company and the investor as they collect the funds from various investors to invest it in the securities, bonds, equities etc .

3.Insurance Companies

The insurance companies provide various insurance policies to individuals and business inorder to safeguard them against various risks and uncertainties . They accept deposits in the form of premium and pool it into profitable investments to gain returns and in future the insured person can claim money if any uncertainty occurs.

4. Individuals

A Individual is a borrower as he borrow money from the banks for various purposes .

As discussed above among the various agents of capital the net savers of capital are banks, insurance companies, financial brokers since they collect the money from the public then either deposit it with themselves or invest it in a high yielding instruement whereas Individual is a net user as he borrows the money from banks.

Ans (b)

Yes , the net saver in the U.S. economy can become the net user

For Example: When the Individuals borrow the money from banks they become the net user as compared to the situation when Individual deposit money in the bank, Invest in various government securities and acting as a net saver.

The U.S. government can become the net user of the capital when their spending requirements exceed their tax revenues and inorder to meet the money requirements the government borrows the money.

Ans (c).

The three ways in which the capital is transferred between the savers and users are:

1. Investment Banking House.

Transfer through investment banking house under which Investing Banking House underwrites the issue . An underwriter serves as a middlemen who facilitates the issuance of securities . The company sells its stocks to investment banks which in turn sells the same to savers.

The disadvantage of Investment Banking House is that the underwriters in this charges a fee for underwriting the issue and thus reducing the overall profit of the company .

The advantage of Investment Banking House is that the company is secured against the risk of unsubscribed issue by the public.

2. Pension Funds.

Under this certain amount is deducted from the salary of employees each month and this collected sum is invested in different schemes to gain profits and investors fund is returned after his retirement.

The advantage of Pension Fund is that it is the best way to save for retirement .

The disadvantage of Pension Fund is that it offers lack of flexibility to access your money.

3. Stock Exchanges.

Stock exchanges facilitate the trading of various securities and stocks and it charges the brokerage from each party.

The advantage of stock exchanges is that it offers you to make money by buying at low and selling at high.

The disadvantage of stock exchanges is that it is associated with huge risks.