Discussion Activity: Bigger is Not Always Better

Introduction:

The loanable funds market is really a picture of financial markets. Savers are the sellers in this market, while borrowers are the buyers. Firms borrow to fund investment in buildings, equipment, and inventory. Governments borrow to pay for public goods like roads, bridges, and national defense, in addition to wealth transfer programs. Every dollar borrowed requires a dollar saved, so we need savings to fund the private and public sector investments that help increase GDP in the future.

Discussion Questions:

1. Suppose your bank uses your savings to make a loan to a computer company. Is this an example of direct or indirect finance?

2. Explain why financial markets play a critical role in the macroeconomy.