When the allocative function of a financial market is performed well, the rate of return offered to ______ would be higher.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → households
Option (1) business firms — Incorrect. Business firms are the users of funds. When allocation works well, scarce resources go to the firms with the highest productivity. The higher return goes to the savers.
Option (2) commercial banks — Incorrect. Banks are a channel. They take deposits from households and lend them to firms, so they are not the savers who earn this return.
Option (3) households — Correct. The allocative function means directing funds to their most productive use. Households are the savers, so when their funds are well used, the rate of return offered to households is higher.
Option (4) mutual funds — Incorrect. Mutual funds are participants in the money market. The higher return in this case goes to the households who save.
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: |