Under the function ‘facilitating price discovery’, the interaction between the suppliers of funds and those who demand funds helps to establish the price of a financial asset. In the financial market, who represents the demand for funds?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Business firms
Option (1) Households — Incorrect. Households save, so they are the suppliers of funds.
Option (2) Business firms — Correct. Business firms need funds to invest, so they represent the demand. Their interaction with households sets the price of a financial asset.
Option (3) Commercial banks — Incorrect. Banks are a channel that takes deposits and lends them to firms. In price discovery the demand side is business firms.
Option (4) Mutual funds — Incorrect. Mutual funds are participants in the money market. They are not the demand side in price discovery.
NCERT (Pre-rationalised Edition): “2. Facilitating Price Discovery: You all know that the forces of demand and supply help to establish a price for a commodity or service in the market. In the financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.” |