Financial markets improve economic welfare because:

• A. they eliminate all risks in the economy
• B. they allocate resources efficiently by matching savers with borrowers
• C. they prevent the formation of monopolies
• D. they guarantee profits for all investors

Answer: (B)

Verified step by step guidance

1. Understand the role of financial markets in the economy: Financial markets serve as platforms where savers (those with excess funds) and borrowers (those needing funds) interact.
2. Recognize that financial markets do not eliminate all risks; rather, they help manage and distribute risk among participants.
3. Identify that financial markets improve economic welfare primarily by efficiently allocating resources, ensuring that funds flow from savers to borrowers who can use them productively.
4. Note that financial markets do not directly prevent monopolies; this is typically the role of regulatory policies and antitrust laws.
5. Acknowledge that financial markets do not guarantee profits for all investors, as investment returns depend on various factors including risk and market conditions.