Describe the nature of the financial system in a modern economy giving the important types of constituent institutions, markets and instruments. Explain the concept of flow-of-funds in the financial markets

The financial system in a modern economy comprises various institutions, markets, and instruments that facilitate the flow of funds.

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Constituent institutions include commercial banks, investment banks, credit unions, and central banks. Financial markets encompass money markets (short-term debt instruments) and capital markets (long-term securities). Instruments range from stocks and bonds to derivatives.

The concept of the flow of funds in financial markets refers to the movement of money between different sectors. This involves transactions between savers and investors, governments, and businesses. The flow of funds reflects how funds move from lenders to borrowers through various channels, impacting economic activities and influencing investment decisions. Understanding this flow is crucial for analyzing the overall health and functioning of the financial system.