How do financial markets primarily influence the economy?

Financial markets play a crucial role in the economy by facilitating the flow of funds between savers and borrowers. This function is essential because it enables individuals, businesses, and governments to obtain the necessary capital for investment and growth. When savers place their money into financial markets, whether through banks, stocks, or bonds, they provide the funds that borrowers need for various purposes, such as purchasing homes, funding business expansion, or undertaking infrastructure projects.

This interaction between savers and borrowers helps to allocate resources efficiently, as funds are directed toward the most productive uses based on interest rates and risk assessments. The presence of a vibrant financial market ensures that savings can be turned into investments, which in turn drives economic growth, job creation, and overall prosperity.

The other options focus on different aspects of economic policy or structures, such as government spending, tax rates, and money supply management, which are influenced by broader economic policies rather than the primary role of financial markets in funding and investment allocation.