Thus, banks lower transactions costs and act as financial intermediaries-they bring savers and borrowers together. Transaction costs are the costs associated with finding a lender or a borrower for this money. Those who want to borrow money can go directly to a bank rather than trying to find someone to lend them cash. Also, those with extra money that they would like to save can store their money in a bank rather than look for an individual who is willing to borrow it from them and then repay them at a later date. A bank allows people and businesses to store this money in either a checking account or savings account, for example, and then withdraw this money as needed through the use of a direct withdrawal, writing a check, or using a debit card.īanks are a critical intermediary in what we call the payment system, which helps an economy exchange goods and services for money or other financial assets. Even small businesses would need stockpiles of cash to pay workers and to purchase supplies. When shopping for a large purchase or going on vacation you might need to carry hundreds of dollars in a pocket or purse. ![]() Imagine for a moment what the economy would be like if everybody had to make all payments in cash. Banking is intimately interconnected with money and consequently, with the broader economy.īanks make it far easier for a complex economy to carry out the extraordinary range of transactions that occur in goods, labor, and financial capital markets. From a broader perspective, however, the bank robber was more right than he may have known. Most money is in the form of bank accounts, which exist only as electronic records on computers. He is wrong because the overwhelming majority of money in the economy is not in the form of currency sitting in vaults or drawers at banks, waiting for a robber to appear. He answered: “That’s where the money is.” While this may have been true at one time, from the perspective of modern economists, Sutton is both right and wrong. ![]() Somebody once asked the late bank robber named Willie Sutton why he robbed banks. Analyze the causes of bankruptcy and recessions.Evaluate the relationship between banks, savings and loans, and credit unions.Explain how banks act as intermediaries between savers and borrowers. ![]() By the end of this section, you will be able to:
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