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Why is the effectiveness and stability of a country's financial system essential to economic growth?

The government cannot function without issuing stocks.

Households cannot save if they do not borrow money.

It allows firms to finance technological advancements, which lead to economic growth.

Firms need it to loan money to employees.

User Exlord
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19 votes

Answer:

It allows firms to finance technological advancements, which lead to economic growth.

Step-by-step explanation:

Economic growth depends in part on advances in technology and the growth of capital. Both of these have a positive impact on labor productivity. When firms are able to expand their capital stock, labor productivity can increase. Investment in these resources is, however, expensive. Firms must have the ability to raise the funds necessary to finance these growth‑promoting opportunities.

At the same time, households may not desire to spend all of their current income but would prefer to put some aside for later use. Letting those funds sit idle, or forcing the households to spend the funds when they would prefer not to, does the economy no good.

Households, therefore, would be willing to let someone else use their money for a while if they were compensated for forgoing current consumption and for any risk. Firms have projects they would like to undertake but need funds to pay for them. Financial markets bring the two sides together and temporarily reallocate financial resources to where they are most needed.

Without a properly functioning financial system, firms may not be able to finance growth‑oriented investments, and economic progress would be much slower.

User Eric Vicenti
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