Importance Of Financial Intermediaries

According to above figure, we know that households do not spend all of the cash they get, so they will save some fraction of those income in financial intermediaries.

The financial intermediaries are any institution which accepts deposits from savers and transfer those money to borrowers or people who need cash for doing the business or investment spending. (William Boyes, Michael Melvin, 1999)

Financial intermediaries are commercial banks, savings and loan associations, saving bank, mutual saving banks, credit unions, life insurance companies, mutual funds, pension funds, and finance companies.

The cash that is saved by households reenters the economy in the form of investment spending as business firms borrow for expansions of their

The main reason that developing countries face very low rates of growth is their financial system are underdeveloped which is known as financial repression.

In the developing countries, the financial systems are facing some problems troubles which lead their operation cannot run smoothly and efficiently.

The legal system functions are working deficiently, so the developing countries cannot use collateral and restrictive covenants to solve adverse selection and moral hazard problem in credit market. People who are surplus of cash can provide loan to people who need cash and get some interest. However, creditors usually face default payment from debtor in a poorly developed finance system. There are also no collateral to offset or secure those debts. Consequently, the lenders will not trust and provide cash to other borrowers. It could lose productive investment opportunities, thus the economy will grow slower. One more, the politic and legal system can cause very difficult issues for debtors

Commonly, economists reserve this term to describe a situation when the monthly inflation rate is greater than 50 percent. It is consider as a rare event, but it occurred as many as 55 times in the 20th century in countries such as China, Germany, Russia, Hungary and Argentina. The table above shows about the hyperinflation, we can see that all the inflation rate per month are higher than 50%.

(Mankiw, N. G., 2009)

Generally, the high rates of inflation are caused by rapid growth of the money supply. When government wants to spend more than it is capable of funding through taxation or borrowing, it simply issues money to finance its budget deficit. As money supply raises faster than the demand to hold it, spending raises and price raises as well. When the money is printed too much, the country’s currency almost becomes worthless and cases to do its job as a medium of exchange. It can have a damaging impact on real output and employment in that country.

During hyperinflation, when amount of currency is printed so much, the price will shoot up, people begin to predict even more rapid inflation and normal economic relationships are