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    Question

    Which of the following is a result of a well-functioning

    financial market?
    A It causes inflation Correct Answer Incorrect Answer
    B It causes an efficient allocation of capital Correct Answer Incorrect Answer
    C It eliminates the need for indirect finance Correct Answer Incorrect Answer
    D It causes financial crises Correct Answer Incorrect Answer
    E It promotes political instability Correct Answer Incorrect Answer

    Solution

    A well-functioning financial market leads to better and efficient allocation of capital resources that leads to economic growth, effective pricing mechanism in the economy and mitigation of risks. Financial markets that have depth and breadth can bring consumers and savers of capital together at lower costs. It is therefore imperative for the smooth functioning of an economy and has positive effects on the economy.

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