Commercial banks link parties with excess funds to those with a deficit of funds. They also foster economic growth, underwrite securities, act as monitors and minimize instabilities, according to Franklin Allen and Elena Carletti in "The Oxford Handbook of Banking." Banks are important players in payment systems, reports economist Sanderson Abel for The Herald.Know More
Banks act as intermediaries, bridging depositors with excess funds to borrowers who need the funds, notes Abel. By availing financing to businesses and even governments, banks contribute to economic growth. Depositors benefit from the banking system by having a safe place to keep their money and interest paid to their accounts and from the pooling of risk. Banks act as financial shock absorbers, providing emergency liquidity in the form of credit and overdrafts for many businesses and households.
Maturation transformation of financial instruments is another important role that these financial institutions play. They take short-term deposits and invest in longer-term instruments. By doing so, they buoy financial markets. Banks are often forced to act as informal monitors because they have to constantly check the repayment abilities of borrowers. With electronic funds transfers and remittances to plastic cards, banks are also an important player in global payment systems, reports Abel. They smooth out irregularities in financial markets by providing funds when needed and absorbing them when they are not.Learn more about Economics
A diversified economy is an economy that has a number of different revenue streams and provides nations with the ability for sustainable growth because there is not a reliance on one particular type of revenue. This diversification provides nations with the security and reliability that they need so that if one economic revenue stream should fail, the nation knows that they have several other options for revenue.Full Answer >
In a traditional economy, products and goods are created as a result of traditions, customs and beliefs. Countries with a traditional economy use the barter system or trading as a primary form of currency. This type of economic system is generally found in rural areas or farm-based areas.Full Answer >
Deflation is bad for the economy because it causes delayed spending, nominal wage cuts, higher interest rates and a higher burden of debt ratio. Deflation is the opposite of inflation and generally causes prices to go down after a recession.Full Answer >
A closed economy refers to an economic system which does not have business relations with any economies outside its own system. Closed economies employ barriers to the trade of goods and services, monies and intellectual property to and from their economic system.Full Answer >