Given below are two statements:Statement I: Banks and financial marke…

Given below are two statements:

Statement I: Banks and financial markets are the two main sectors of an economic system.

Statement II: A financial market helps to link the savers and the investors by mobilising funds between them.

In the light of the above statements, choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Statement I is incorrect but Statement II is correct.

Statement I: Banks and financial markets are the two main sectors of an economic system. — Incorrect. The two main sectors are households and business firms. Banks and financial markets are the two channels through which funds pass from one sector to the other.

Statement II: A financial market helps to link the savers and the investors by mobilising funds between them. — Correct. Households save and firms invest. The financial market moves these savings to the firms, so it links savers and investors.

NCERT (Pre-rationalised Edition): “CONCEPT OF FINANCIAL MARKET A business is a part of an economic system that consists of two main sectors – households which save funds and business firms which invest these funds. A financial market helps to link the savers and the investors by mobilizing funds between them. In doing so it performs what is known as an allocative function. It allocates or directs funds available for investment into their most productive investment opportunity. When the allocative function is performed well, two consequences follow:
• The rate of return offered to households would be higher
• Scarce resources are allocated to those firms which have the highest productivity for the economy.
There are two major alternative mechanisms through which allocation of funds can be done: via banks or via financial markets. Households can deposit their surplus funds with banks, who in turn could lend these funds to business firms. Alternately, households can buy the shares and debentures offered by a business using financial markets. The process by which allocation of funds is done is called financial intermediation. Banks and financial markets are competing intermediaries in the financial system, and give households a choice of where they want to place their savings. …”