Question

In 2 to 4 sentences, describe how money is channeled from savers to borrowers to investors.

Answer 1

The primary purpose of the financial markets is to route surplus reserves from people who have gathered from their salaries to people who need to finance their expenditure or corporations that require reserves to support capital investments. There are couple ways in which funds are routed from savers/donors to spenders/borrowers.

1. Direct Financing: Funds are loaned directly from savers to spenders.
2. Indirect Financing: Where an intermediary i.e. bank is involved between donors and borrowers.

Answer 2

The borrower may chose to use the funds to invest in a business venture and thus be becomes an investor. Money is channeled through financial institutions such as banks. A saver saving with a bank account seeks to keep the money in the bank as it earns him interest.