Chapter 22, Problem 1FRQ

To determine

The three tasks of a well-functioning financial system.

Explanation of Solution

A well-functioning financial system will perform the following tasks:

1. A well-functioning financial system would decrease the transaction cost because the components of the financial system can be accomplished through a phone call, an online website, or by visiting a branch office.
2. This financial system would facilitate investment spending by permitting companies to borrow at a large scale with low or no transaction cost.
3. There would be low risk in a well-functioning financial system because there is low risk and more engagement in investment spending in any kind of unexpected situation in the economy.
4. Moreover, this financial system offers liquidity at a low cost and faster speed while converting assets into cash.

Economics Concept Introduction

Introduction: Financial system refers to a set of financial institutions that offers the exchange of funds, insurance, and deposits such as banks, insurance companies, etc.

Financial assets refer to the liquid assets that consider value from any ownership claim such as cash, bonds, stocks, etc.