Final answer:
The money market involves the trading of short-term funds that are expected to mature within one year, unlike the capital market where investments are for periods longer than a year. It's part of the broader M2 money supply and includes money market accounts and funds that invest in short-term securities like government bonds.
Step-by-step explanation:
By definition, the money market involves the buying and selling of short-term funds, which specifically refers to investments that are expected to mature within one year. This is different from the capital market, where money is loaned for more than one year, often in the form of corporate bonds, government bonds, or long-term certificates of deposit. The money market is crucial for enabling investors and institutions to manage their short-term cash needs efficiently.
Part of the broader money supply categorized as M2, money market accounts combine the deposits of multiple investors to purchase safe, short-term securities like government bonds. The distinction between money market and capital market is crucial, as the former handles the trading of short-term securities, while the latter deals with longer-term investments. Additionally, we observe that the money market fund is a place where pooled deposits are invested in short-term government bonds, providing a safe investment opportunity.
In the context of M2, which includes a broader range of financial assets such as M1 (cash, checking accounts, traveler's checks), savings deposits, money market funds, and small certificates of deposit, the money market accounts are an essential component, as they allow flexibility yet require more effort to access than M1 components.
The correct answer to the question is: A) short-term funds.