Financial Intermediaries

Overview

Finance is the process by which agents in the economy that have a surplus of funds lend those funds to agents who have a shortage. The agents who have a surplus of funds could just save that money by saving it in a safe or proverbially stashing it underneath the mattress. However, this method of saving does not generate any return, and in fact, in the presence of inflation, will lose value over time. Hence, savers are motivated to find other agents in the economy who can find productive uses for the funds for which the saver can pocket a portion of the return.