Final answer:
Financial institutions and markets are essential in directing funds from savers to borrowers through capital and money markets, offering different investment options with varied returns, risks, and liquidity. Banks play a central role as intermediaries, and mechanisms like FDIC insurance provide stability. Instruments like stocks, bonds, and loans enable the deployment of financial capital in the economy.
Step-by-step explanation:
Financial institutions, markets, and money play a crucial role in the economy by facilitating the flow of capital between savers and borrowers. Capital markets allow for long-term investments, such as corporate or government bonds, for timeframes extending beyond one year, while money markets focus on short-term loans under a year. Investments can be assessed based on average expected return, risk, and liquidity; generally, higher returns come with greater risk or less liquidity.
Banks, as financial intermediaries, offer a variety of accounts and act to balance the supply and demand in the financial capital market. The existence of institutions like the Federal Deposit Insurance Corporation (FDIC) enhances market stability by insuring deposits to protect against bank failures. Meanwhile, the financial markets serve the vital function of channeling savings of individuals to firms wanting to raise capital, through vehicles like stocks, bonds, and bank loans.