Chapter 5R, Problem 4MCQ

To determine

The correct option that defines the task of the financial system.

Answer to Problem 4MCQ

Option e is correct.

Explanation of Solution

Explanation for the correct option:

e.

In a financial system, efforts are taken to reduce the transaction cost, ensure liquidity and minimize financial risk which can be done by ensuring the efficiency of the financial market. Therefore, option e is correct.

Explanation for incorrect options:

a.

If the risk is maximized, the financial market will not be called an efficient financial market. Therefore, option a is incorrect.

b.

The financial system helps in reducing transaction costs so that traders can purchase or sell financial assets more easily. Therefore, option b is incorrect.

c.

A diversified market is less risky than an undiversified market. Decreasing diversification will increase the market risk. Therefore, option c is incorrect.

d.

Ensuring liquidity is one of the tasks of the financial system. Therefore, option d is incorrect.

Economics Concept Introduction

Financial system: Financial system refers to the system that facilitates the borrower to borrow capital and the investors to invest their savings in the financial market.