ECON100 Assessment week 11.docx - Dylan Thorpe ECON100 Assessment 1 Week 11 1 Why is the financial system of a country important for long-run economic

ECON100 Assessment week 11.docx - Dylan Thorpe ECON100...

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Dylan Thorpe ECON100 Assessment 1 Week 11 1. Why is the financial system of a country important for long-run economic growth? Why is it vital for economic growth that firms have access to adequate sources of funds? The process of economic growth depends on the ability of firms to expand their operations, buy additional equipment or adopt new technologies. A financial system allows businesses to borrow funds to finance purchases of capital equipment or to adopt new technologies. Firms can finance some of these from retained earnings, which are profits that are reinvested in the firm rather than taken out of the firm and paid to the firms owners. Firms acquire funds from households, either directly through financial markets such as the share and bond markets – or indirectly through financial intermediaries – such as banks. Without a well functioning financial system, economic growth is very unlikely because firms will be unable to expand and adopt new technologies.
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