Question

Summarize how savers, financial institutions and borrowers interact to help the economy to create capital.

Answer 1

Answer:

Borrowers need capital in order to invest and start businesses. They can be both companies and individuals.

Savers on the other hand have capital and want to grow it so they need to find a way to get it to Borrowers who will then use it to invest.

This is where Financial institutions such as banks and mutual funds come in. They act as intermediaries and collect money from the savers and pool it together so that it becomes a significant amount. Borrowers then go to these institutions and present their plans to justify their need for capital.  

If the plans are within an allowable risk threshold, they get the funds and then pay it back with interest as the business progresses thereby making money for both themselves and the savers.