2-2 Describe the different ways in which capital can be transferred from suppliers of capital to...

2-2 Describe the different ways in which capital can be transferred from suppliers of capital to
those who are demanding capital.What would happen to the U.S. standard of living if people lost faith in the safety of the financial institutions? Explain. What types of changes have financial markets experienced during the last two decades? Have they been perceived as positive or negative changes? Explain.

Expert Solution

The different ways in which capital can be transferred from suppliers of capital to those who demand capital are debt, equity and other hybrid instruments. They can involve direct transfer of money and securities from the two parties.

If people lost faith in the financial systems and institutions, the savers would not provide their capital for the use of borrowers. This would affect the borrowers ability to raise capital for businesses and their businesses would suffer as a result. Hence, it can result in the industries suffering and the output coming down as a result and too few goods chasing too many users which would result in the increase in prices and inflation. Hence, the amount of goods you could buy with the same amount of money would come down and as a result the standard of living will come down.

There has been a lot of changes in the markets in the last two decades. The beginning of the decade saw the bursting of the dot com bubble which led to a high drop in the value of the technology companies. Then after that till 2007-08 we saw a huge bull run in the markets. The real estate markets were going up and so were the stock markets. But in 2008 the sub-prime crisis happened and the real estate sector saw a huge decline in valude as a result of which many people lost their homes and jobs. Presently, now in 2020, we are seeing the Corona Virus Pandemic which is affecting the markets to a loarge extent and it is expected that a recession is going to come in some time. Not all the developments in the two decades have been bad. Some good things which happened related to financial markets is that we saw a huge increase and development of technology which resulted in improvement of accessibility for the people in financial markets. The borrowers could borrow easily and the savers could invest their savings in an easier and more transparent manner.

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