Mrs. and Mr. Savvy of Newland have accumulated Newdollars 1,000 and wish to invest them for the future. Although the Savvys are willing to take some risks, they cannot afford to lose too much money. They may need to cash out quickly if a baby Savvy arrives unexpectedly. Newland has many businesses with varying levels of risks in need of money and many households willing to supply money, but no financial institutions (no banks, no stock brokers/dealers, no mutual funds, no insurance company, etc.). The Savvys, like other households in the country, do not know much about the expected profitability and risks of these businesses.

Describe how the Savvys investments can reach businesses in need of cash. What potential impediments/disincentives are likely to obstruct the transfer of the funds? Explain how different kinds of financial institutions can help solve these problems and enable a more smooth flow of funds. Use examples.