CSEET · Economic and Business Environment · National Income Accounting and Related Concepts
In the circular flow of income, financial markets and institutions such as banks mainly serve the purpose of:
Financial markets convert household saving into funds for investment by firms. Saving is a leakage from the flow, and when banks and markets lend it to businesses for investment, it returns to the flow as an injection.
- AConverting household saving into funds for investment by firmsCorrect
- BPaying wages and rent directly to households
- CCollecting taxes from firms on behalf of the government
- DReducing imports by taxing foreign goods
Explanation
Saving is a leakage from the household sector. Financial markets channel it to firms and others as loans or equity, which funds investment, an injection. Thus they link the leakage of saving to the injection of investment. Paying wages and collecting taxes are not their role in the model.
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