Which of the following statements about the importance of the financial market is true?

• A. Financial markets are primarily responsible for setting government fiscal policy.
• B. Financial markets eliminate all risks associated with investing in securities.
• C. Financial markets facilitate the transfer of funds from savers to borrowers, promoting economic growth.
• D. Financial markets only benefit large corporations and have little impact on individual investors.

Answer: (C)

Verified step by step guidance

1. Understand the role of financial markets: Financial markets are platforms where buyers and sellers trade financial instruments such as stocks, bonds, and derivatives. Their primary function is to facilitate the transfer of funds from savers (individuals or entities with surplus funds) to borrowers (individuals or entities needing funds). This process promotes economic growth by enabling investments in businesses, infrastructure, and other productive activities.
2. Evaluate the first statement: 'Financial markets are primarily responsible for setting government fiscal policy.' Fiscal policy refers to government decisions on taxation and spending, which are determined by government entities, not financial markets. Therefore, this statement is incorrect.
3. Evaluate the second statement: 'Financial markets eliminate all risks associated with investing in securities.' Financial markets do not eliminate risks; they provide mechanisms to manage and trade risks. Investing in securities always carries some level of risk, such as market risk, credit risk, or liquidity risk. Hence, this statement is incorrect.
4. Evaluate the third statement: 'Financial markets facilitate the transfer of funds from savers to borrowers, promoting economic growth.' This is a correct and fundamental function of financial markets. By channeling funds efficiently, they support investments and economic development.
5. Evaluate the fourth statement: 'Financial markets only benefit large corporations and have little impact on individual investors.' Financial markets benefit both large corporations and individual investors. They provide opportunities for individuals to invest, save, and grow their wealth, as well as for corporations to raise capital. Therefore, this statement is incorrect.