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CA Foundation · Business Economics · Money Market

Which statement best explains why the money market helps in equilibrating the short-term demand for and supply of funds?

The money market lets entities with surplus funds lend to those facing temporary deficits, and the market-determined short-term interest rate balances the two sides. This is how it equilibrates short-term demand and supply of funds. It does not force fixed lending or remove reserve requirements.

  1. AIt lets entities with surplus funds lend to those with temporary deficits, so both sides meet at a market-determined short-term rateCorrect
  2. BIt compels all banks to lend a fixed amount to the government at a fixed rate
  3. CIt converts all short-term deposits into permanent capital
  4. DIt eliminates the need for any cash reserves in banks

Explanation

The money market brings together lenders with temporary surpluses and borrowers with temporary shortfalls, and the short-term rate adjusts to balance the two. It does not compel fixed lending, convert deposits into permanent capital, or remove reserve needs.

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