Final answer:
Money market mutual funds invest pooled funds from individual investors in short-term, interest-bearing instruments such as certificates of deposit and U.S. government securities. They aim to provide liquidity and safety for investors looking for short-term investments, and play a role in the money supply via the money multiplier formula.
Step-by-step explanation:
Money market mutual funds use the combined funds of individual investors to purchase various interest-bearing short-term credit instruments, such as certificates of deposit and U.S. government securities. Unlike the capital markets, which deal with loans longer than one year and include instruments like government savings bonds and IRAs, money markets focus on lending for less than one year. This setup allows these funds to invest in a safe manner by pooling together money and typically buying short-term government bonds among other safe securities.
This structure helps money market funds manage the risk while aiming to provide liquidity to individual investors who need shorter-term investment options. Moreover, the concept of the money multiplier formula can help understand the impact of such funds on the general money supply, as this formula represents the total money in the economy divided by the original quantity of money.