1) a. How do commercial banks alleviate the problem of liquidity risk that investors would face if they were to directly loan funds to individuals and corporations? b. What are the main differences between money markets and capital markets. Solution 1b.Main differences between money markets and capital markets are as follows-Basis for comparisonMoney marketsCapital marketsMeaningA segment of the financial market where lending and borrowing of short term securities are done.A section of financial market where long term securities are issued and traded.Risk factorLowComparitively HighReturn on investmentLessComparitively highFinancial instrumentsTreasury Bills, Commercial Papers, Certificate of Deposit, Trade Credit etc.Shares, Debentures, Bonds, Retained Earnings, Asset Securitization etc.TimeWithin a yearMore than a yearMeritIncreases liquidity of funds in the economy.Mobilization of Savings in the economy.LiquidityThe money market instruments are rich in liquidityThe instruments of capital market are not that much liquid.