With reference to the 'Capital formation'which of the statements is/are correct?1.Process of capital formation depends on savings and effectiveness of financial institutions.2.Investment is the essential factor of capital formation.Select the correct answer using the codes given below. Codes:

1. A

   Only 1

   Only 1 would accept savings and financial institutions but drop investment as essential. Capital formation in standard macroeconomics is the process that turns saving into real capital through investment, so dropping statement 2 is wrong.

2. B

   Only 2

   Only 2 would keep investment and reject the role of savings and financial intermediaries. Without saving (and channels that mobilise it), investment cannot be sustained, so ‘2 only’ fails.

3. C

   Both 1 and 2

   Both statements are correct: capital formation depends on the volume of savings and on how effectively banks and other financial institutions mobilise and allocate them, and investment is the essential act that creates capital goods. That is the official key.

4. D

   Neither 1 nor 2

   Neither 1 nor 2 would contradict elementary growth theory. Both limbs are textbook-true in this framing.

Summary. Official key is (c) both 1 and 2. Saving is the surplus not consumed; financial institutions gather it; investment purchases machines, buildings and inventories—the capital stock. Either limb alone is incomplete. Honour the stored letter (c).