What is the impact of money, banking, and financial intermediation on the econom

Question

What is the impact of money, banking, and financial intermediation on the economy? That is,

a. what is the role of money, what is your view of money, how has money evolved through time in different societies, what are the shortcomings and benefits?

b. What role do banks play, is there a more efficient mechanism we could use, are banks beneficial, how do they contribute to GDP?

c. What is the role of financial intermediation, is financial intermediation necessary, how else might an economy organize itself?

Explanation / Answer

a. In ancient time, commodities are used to make transactions without the use of money which is known as barter exchange. Goods are exchanged for goods rather than use of money, it is also called Commodity-to-Commodity economy. Due to various shortcomings of the barter exchange like double coincidence of wants, lack of common measure of value, difficulty in store of value leads to evolution of money in the economy. Money overcome all the drawbacks of barter exchange and make transaction easy. Money act as a medium of exchange through which person can purchase any good or service against it without the requirement of other commodity. It make storage of wealth possible.

b. Banks plays an important role in the economy as they act as a link between savers and borrowers. They take deposits from the public and invest them in more productive areas which helps in the development of an economy. They control money supply in the economy with the help of Central bank. Banks accepts deposits and lend money.

c. Financial intermediation include banks, insurance companies, pension funds, etc. They act as a intermediary between the two parties in a financial transaction. Financial intermediaries are necessary in an economy as they mobilise the savings of public.

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