“Neither a borrower nor a lender be,” Polonius advises his son in Shakespeare’s Hamlet. If very one followed this advice, this chapter would have been unnecessary Few economists would agree with Polonius. In our economy, people borrow and lend often, and usually for good reason. You may borrow one day to start your own business or to buy a home. An people may lend to you in the hope that the interest you pay will allow them to enjoy a more prosperous retirement The financial system has the job of coordinating all this borrowing and lending activity.
In many ways, financial markets ~re like other markets in the economy. The price of loan able funds the interest rate-is governed by the forces of supply and demand, just as other prices in the economy are And we can analyze shifts in supply or demand in financial markets as we do in other markets. One of the Ten Principles of Economics introduced in Chapter I is that markets are usually a good way to organize economic activity. This principle applies to financial markets as well. When financial markets bring the supply and demand for loan able funds into balance, they help allocate the economy’s scarce resources to their most efficient use In one way, however, financial markets are special. Financial markets, unlike most other markets, serve the important role of linking the present and the future. Those who supply loan able funds-savers-do so because they want to convert some of their current income into future purchasing power. Those who demand loan able funds-borrowers-do so because they want to invest today in order to have additional capital in the future to produce goods and services. Thus, well-functioning financial markets are important not only for current generations but also for future generations who will inherit many of the resulting benefits .
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