The stock exchanges help the economy by helping in __:
1. Creation of money
2. Capital formation
3. Foreign investments
Select the correct option from the codes given below:

Answer: [D] 1, 2 & 3

First choice is “Creation of Money”. In sense of economy, creation of money is the process by which money supply of economy increases. When the central bank / commercial banks purchase securities, they need to release money in the market and thus, stock exchanges do help in creation of money. However, please note that that stock exchanges just “help” in creation of money, they themselves don’t create money.

Second choice is “Capital formation”. The question is simply asking if the stock market transactions affect capital formation. Capital formation refers to net additions of capital stock such as equipment, buildings and other intermediate goods. Here, we note that Saving and investment are essential for capital formation. The stock markets help by mobilizing investments from investors and providing avenue for savers to divest through the secondary market. This helps in availability of the liquid assets for investment purposes and this ultimately has impact on output level of goods and services in the economy that are consumed.

Third choice is foreign investments. All you know about FII and thus this is also a correct choice.

This question is a part of GKToday's Integrated IAS General Studies Module