Final answer:
Financial assets don't directly enhance an economy's productive capacity; they represent claims on future income, as opposed to physical capital which is a direct input in the production process. Increased government borrowing can crowd out private investment, affecting economic growth.
Step-by-step explanation:
Financial assets do not directly contribute to the productive capacity of the economy. While assets and debts in dollars do not cause banking system failure due to changes in the value of the dollar, real capital investments like purchasing new machinery in a garment factory can increase production, illustrating the difference between financial and physical capital. Financial assets, such as money, stocks, and bonds, represent claims on future income, unlike physical capital which directly impacts production by being an input in the production process.
Governments and central banks can influence the availability of financial capital through monetary policies and public investments. When government borrowing increases, this can lead to crowding out private investment in physical capital, affecting the economy's growth potential. The crowding out effect happens when government consumption of financial capital reduces the amount available for private sector investments in physical capital, potentially stifling economic expansion.