Final answer:
The transformation process or intermediation reduces the risk to savers by diversifying their investments through a financial institution, which lends money and creates money in the economy, while also managing economic risks and lowering transaction costs.
Step-by-step explanation:
The transformation process, or intermediation, reduces the risk to savers by diversifying the portfolio. Financial institutions like banks safeguard the interests of savers by spreading investments across various assets, thereby minimizing the impact of a default on any single investment. By holding a blend of different types of loans and investing in both loans and reserves, banks mitigate risk and ensure stability. Furthermore, because banks only keep a fraction of deposits as reserves, the cycle of lending money, its re-deposition, and subsequent lending contributes to money creation in the economy. This intermediary role by banks is foundational in connecting savers with borrowers, which lowers transaction costs and helps in managing economic risks.