The relationship between the money supply and economic activity has a long history. One could not survive without the other. One of the ways that money is transferred between savers and businesses is through direct transfers. This is where investors do not use a financial institution to purchase securities, which are stocks or debt instruments. The money is directly transferred from the purchaser to the business, and in return, the business gives them securities (Axia College, 2011).
The second way that money is transferred between savers and businesses is indirect transfers. This is where investors use an investment banking firm, and transfer their money in order to receive securities in return. Usually, investment banking firms purchase the securities first, and then resell them to the investors (Axia College, 2011).
The third way is also an indirect transfer, where investors put their money into a savings institution like a bank or mutual fund. This is in exchange for a certificate of deposit, which serves as a type of promissory note. The money then is given to a business as a loan to finance their operations. The firm’s securities are passed to the financial institution. It is a sort of circle of money passing through hands, but all parties do get a return on the investments they have made.
Depository institutions, also known as banks, savings and loans, and credit unions, are important because the money that is deposited into their institutions is reinvested into the system. This is generally in the form of loans and investments. The more money that is deposited into banks et al. can be loaned out. This creates more revenue, and more deposits, which keeps money moving in the financial health of the country.
Money has three functions. The first is that it serves as a medium of exchange. It is used in transactions between investors and savers. One exchanges