Chapter 22, Problem 2CYU

To determine

The relationship that would be expected to find between the level of development of a country's financial system and its level of economic development in terms of the country's levels of savings and investment spending.

Explanation of Solution

Economic development and growth would be the result of different factors of production, investment spending, and factors that cause expenses on physical capital. When this investment spending is equal to savings, then there would be a greater saving amount saved and higher investment spending will result in higher growth and economic development.

Therefore, the availability of institutions that will facilitate savings would help the country to achieve a financial system that delivers low transaction costs, diversification of risk for opportunities, and high liquidity for the people who prefer savings. The economy, in this case, will experience faster growth and development as compared to a country that doesn't have any financial system or institution.

Economics Concept Introduction

Introduction: Financial system refers to a set of financial institutions that offers the exchange of funds, insurance, and deposits such as banks, insurance companies, etc.

Financial assets refer to the liquid assets that consider value from any ownership claim such as cash, bonds, stocks, etc.