Question

“A well-functioning (developed and efficient) financial system will efficiently allocate funds from suppliers of funds (surplus units) to users of funds (deficit units)”. Would you agree with this statement? In your answer, make sure to  provide a brief definition of a financial system;  identify the key components of a financial system;  provide a definition of surplus and deficit units;  identify the key surplus and deficit units in the Australian financial system; and  answer above statement by identifying the characteristics of a well-functioning, efficient and developed system

Answer 1

Yes, I agree with this statement that an efficient and developed financial system will be helping in efficiently allocating fund from supplier of funds to the user of the funds and it will helping in appropriate allocation of the credit and ensuring the proper liquidity in the market because a well managed financial system is responsible for generation of appropriate capital for various companies who are operating in the industry and it will be also providing with investment opportunities for various depositors so it can be said to have a lot of financial intermediaries who can analyse the savings from the depositors to the borrowers and hence it will maintain an appropriate amount of liquidity and credit availability to a large number of borrowets.

Financial system is an appropriate system of management of finance in an economy and it will be having various components like investment bankers and commercial bankers as well as it will also include regulatory organisations and other depositories which will be providing and appropriate opportunity of proper investment and proper Borrowing.

Surplus units are those units who have a high amount of income then their requirements and expenditure and they are investing, While, dlDeficit units are those units have a large amount of expenditure than the income and they are borrowing in order to meet with the expenditure so they will be deficit units.

Well functioning financial system will be helpful in generation of appropriate credit opportunity and liquidity to a large number of market participants and it will also ensure proper channelization of resources in the economy so that economy can prosper.