Part 1Financial markets perform the basic function of:Part 2
A. providing a risk-free means of storing wealth B. mitigating the business cycle C. matching savers with funds to lend to people who want to borrow funds D. assuring that governments need never resort to printing money to finance their expenditure

Question

Part 1Financial markets perform the basic function​ of:Part 2
A. providing a​ risk-free means of storing wealth B. mitigating the business cycle C. matching savers with funds to lend to people who want to borrow funds D. assuring that governments need never resort to printing money to finance their expenditure

BlackTom AI · Accepted Answer

When evaluating the function of financial markets, we consider the core roles they play in an economy.
Option A: 'providing a risk-free means of storing wealth' is not accurate because financial markets involve risk; returns depend on investments and instruments, and while some instruments may be relatively safe, markets as a whole do not offer a guaranteed risk-free store of wealth.
Option B: 'mitigating the business cycle' suggests that markets themselves smooth out economic fluctuations, which is an indirect effect at best. Financial markets can influence capital allocation and funding conditions, but they do not directly eliminate or neutralize the business cycle, which is driven by a broad set of macroeconomic forces.
Option C: 'matching savers with funds to lend to people who want to borrow funds' captures a central function of financial markets. They provide a mechanism for those who have surplus funds (savers) to channel them to those who need funds (borrowers), enabling investment and economic activity through intermediation and price discovery.
Option D: 'assuring that governments need never resort to printing money to finance their expenditure' is inaccurate. Governments may still resort to monetary financing or debt issuance, and financial markets do not guarantee that governments won’t resort to printing money; this option misstates the relationship between markets and fiscal-microeconomic policy.
In sum, the practical, textbook role of financial markets is efficiently pairing savers who supply funds with borrowers who demand funds, thereby facilitating capital allocation and investment across the economy, while the other statements either overstate guarantees, mischaracterize effects on the business cycle, or misstate the government's financing options.

Quiz:Quiz 1

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