Match List-I (concepts related to the financial market) with List-II (their meanings):
| List-I | List-II | ||
|---|---|---|---|
| (A) | Allocative function | (I) | Banks and financial markets competing to give households a choice of where to place their savings |
| (B) | Financial intermediation | (II) | Directing funds available for investment into their most productive investment opportunity |
| (C) | Price discovery | (III) | Holders can easily convert their financial assets into cash whenever required |
| (D) | Liquidity | (IV) | Interaction of the suppliers and the users of funds sets the value of a financial asset |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A)-(II), (B)-(I), (C)-(IV), (D)-(III)
| List-I | List-II | Reason |
|---|---|---|
| (A) Allocative function | (II) Directing funds available for investment into their most productive investment opportunity | Allocation means sending savings to the uses where they give the most. So directing funds to the most productive opportunity is the allocative function. |
| (B) Financial intermediation | (I) Banks and financial markets competing to give households a choice of where to place their savings | Intermediation is the process by which funds are allocated. Banks and financial markets are the two competing channels for household savings. |
| (C) Price discovery | (IV) Interaction of the suppliers and the users of funds sets the value of a financial asset | Households supply funds and business firms demand them. Their interaction sets the price of the financial asset. |
| (D) Liquidity | (III) Holders can easily convert their financial assets into cash whenever required | Easy purchase and sale lets a holder sell an asset for cash whenever it is needed. |
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: “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.” “3. Providing Liquidity to Financial Assets: Financial markets facilitate easy purchase and sale of financial assets. In doing so they provide liquidity to financial assets, so that they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanism of the financial market.” |