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Institutions and Markets, presents an overview of the financial system and its important components: policy makers, monetary system, financial institutions, and financial markets. Financial institutions operate within the financial system to facilitate the work of the financial markets. For example, you can put your savings in a bank and earn interest. But your money just doesn’t sit in the bank. The bank takes your deposit and the money from other depositors and lends it to Kathy, who needs a short-term loan for her business; to Ian for a college loan; and to Roger and Jayden, who borrow the money to help buy a house.
Banks bring together savers and those who need money, such as Kathy, Ian, Roger, and Jayden. The interest rate the depositors earn and the interest rate that borrowers pay are determined by national and even international economic forces. Just what the bank does with depositors’ money and how it reviews loan applications is determined to some extent by bank regulators and financial market participants, such as the Federal Reserve Board. Decisions by the president and Congress relating to fiscal policies and regulatory laws may also directly influence financial institutions and markets and alter the financial system.
But your money just doesn’t sit in the bank.