What is the Economic function of finance?
The financial system has five parts, each which plays a fundamental role in our economy. Those parts are: money, financial instruments, financial markets, financial institutions and central banks.
The first part of the system is money which is used to pay for our purchases and to store wealth. The second part, financial instruments are used to transfer resources from savers to investors and to transfer risk to those who are best equipped to bear it. Stocks, mortgages and insurance policies are examples of financial instruments. The third part, financial markets allow us to buy and sell financial instruments quickly and cheaply. The New York Stock Exchange is an example of a financial market. The fourth part, financial institutions provide a myriad of services, including access to financial markets and collection of information about prospective borrowers to ensure they are creditworthy. Banks securities firms, and insurance companies are examples of financial institutions finally the fifth part of the system, the central banks monitor and stabilize the economy, and the Federal Reserve System is the central bank of the United States.
The roles of all of these parts have changed and are changing over time. Money consisted for a long time of silver and gold coins, but they where replaced by paper currency and now paper is replaced by electronic funds. Financial instruments have changed from being an activity for only the rich to something everyone can do. Financial markets where originally located at coffee houses and taverns where individuals meet and exchanged financial instruments. Nowadays no individuals meet and the exchange is computerized. Financial institutions change as well, banks today are more like ...