Which of the following statements about the functions of a financial market is incorrect?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → The interaction between households and the Reserve Bank of India helps to establish the price of a financial asset.
Option (1) In the financial market, the households are the suppliers of funds. — True. Households save, so they supply funds.
Option (2) Financial markets provide liquidity, so that financial assets can be easily converted into cash whenever required. — True. This is the liquidity function. Easy purchase and sale lets holders turn their assets into cash.
Option (3) Financial markets provide valuable information about the securities being traded in the market. — True. This information reduces the cost of transactions. Buyers and sellers find each other with less time, effort and money.
Option (4) The interaction between households and the Reserve Bank of India helps to establish the price of a financial asset. — False. The price is set by the interaction of households, who supply funds, and business firms, who represent the demand. The Reserve Bank of India is a money market participant and is not one of these two sides.
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.” “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.” “4.Reducing the Cost of Transactions: Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other. The financial market is thus, a common platform where buyers and sellers can meet for fulfillment of their individual needs.” |