Answer to Question #121872 in Macroeconomics for mark

Question

Allen would like to open a business to produce a software that he thinks would be well-received by the market. However, the investment needed to start a busi- ness is very high and Allen could barely cover it on his own. The software is very likely to be successful and generate profits, but it takes 2 years before profits are generated. Explain why the existence of a financial intermediary, like a bank, makes Allen’s investment more likely.

Answer 1

Currently, Allen is not able to raise the initial capital for his project. However, he can source an alternative source of capital which is borrowing from the financial intermediaries.

The availability of financial intermediaries will make Allen's investment more likely as he will borrow capital from them as well as get advice on his investment idea to help him minimize the risks associated with his investment.