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IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system

A household in Pune deposits savings with a bank, which lends the money to a manufacturing firm in Chennai. Which core function of the financial system does this chain of transactions primarily illustrate?

The chain shows the financial system moving funds from surplus units, the household savers, to deficit units, the borrowing firm, through a bank acting as intermediary. It is about channelling savings into investment, not exchange rates, note printing, price regulation or tax collection.

  1. ATransferring funds from surplus units to deficit units through an intermediaryCorrect
  2. BSetting the exchange rate between the rupee and foreign currencies
  3. CPrinting currency notes to meet the firm's needs
  4. DRegulating the prices charged by the manufacturing firm
  5. Collecting taxes on behalf of the government

Explanation

Savers are surplus units and the firm is a deficit unit. The bank intermediates between them, channelling savings into investment. The other options describe exchange rate determination, note issue, price regulation and taxation, which are not what this chain shows.

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