What role do financial markets play in an economy?

Financial markets play a crucial role in the economy by facilitating the exchange of capital, which is essential for both investment and economic growth. They provide a platform where savers can invest their funds and borrowers can secure financing needed for various projects, such as business expansion or new ventures.

This process of channeling funds from those who have surplus capital to those who need it ensures that resources are allocated efficiently across different sectors of the economy. As a result, this can lead to increased productivity, job creation, and overall economic development.

The other choices do not accurately describe the primary functions of financial markets. Taxation policy is determined by government entities and does not directly relate to the operation of financial markets. Similarly, while financial markets can impact government spending indirectly through the availability of credit, they do not manage government budgets directly. Lastly, while international trade agreements are important for economic interactions, they fall outside the primary objectives and functions of financial markets, which focus instead on capital allocation and risk management.