Question

Please answer the following question:

How would economic transactions between suppliers of funds (e.g. households) and users of funds (e.g. corporations) occur in a world without financial institutions? Please write at least 200 words including two cited source of information. Please write in your own words. Thank You!

Answer 1

In a world without financial organizations, corporate fund consumers in the economy would have to approach money savers directly to meet their borrowing requirements. This method would be highly expensive because of prospective lenders ' up-front data expenses. Cost inefficiencies would result from identifying prospective borrowers, pooling tiny savings into loans of adequate size to finance corporate operations, and assessing possibilities for danger and investment. In addition, lenders would need to monitor borrowers ' operations over the life span of each loan. The net outcome would be an incomplete resource allocation in an economy

In such a globe, fund providers (e.g. households) would have a fundamental option to generate surplus money by consuming less than they receive. By investing in securities issued by fund customers (e.g. companies, governments, or retail borrowers), they could either hold money as an asset or directly transfer that money. Generally speaking, fund claimants (users) issue economic claims (e.g. equity and debt securities) to fund the gap between their investment spending and their internally produced funds, such as retained earnings or tax receipts. We would have direct transfers of funds from fund providers to finance consumers in a globe without financial institutions. In return, financial claims would flow directly from fund users to fund suppliers.

Book- Principle of Finance