Which of the following is most likely to occur in an economy if banking did not exist?

• A. International trade would flourish due to the absence of financial institutions.
• B. Prices would remain stable because there would be no financial intermediaries.
• C. Government spending would automatically increase to compensate for the lack of banks.
• D. Individuals would have limited ability to save and borrow money, reducing investment and economic growth.

Answer: (D)

Verified step by step guidance

1. Understand the role of banks in an economy: Banks act as financial intermediaries that facilitate saving and borrowing by channeling funds from savers to borrowers.
2. Analyze the impact of the absence of banks on saving and borrowing: Without banks, individuals would find it difficult to safely save money or obtain loans, which are essential for funding investments.
3. Consider how limited saving and borrowing affect investment: Reduced access to funds means fewer investments in businesses, infrastructure, and innovation, which are key drivers of economic growth.
4. Evaluate the consequences for economic growth: With less investment, the economy's capacity to expand and improve productivity diminishes, leading to slower or stagnant growth.
5. Review the incorrect options: International trade is not directly dependent on banks; prices are influenced by many factors beyond financial intermediaries; government spending is a policy decision and does not automatically increase due to the absence of banks.