The U.S. financial system has many complexities, and it is impacted by several environmental factors, including federal regulations and the economy.
Write a two (2) page paper in which you:
- Briefly describe one (1) way the U.S. financial markets impact the economy, one (1) way the U.S. financial markets impact businesses, and one (1) way the U.S. financial markets impact individuals.
- Briefly explain the primary roles of the U.S. Federal Reserve, the Federal Reserve Chairman, and the Federal Reserve Board. Indicate each party’s effectiveness in today’s economic environment. Provide support for your explanation.
- Briefly explain two (2) ways interest rates influence the U.S. and global financial environment. Provide at least one (1) example of such influence for both the U.S. financial environment and one (1) example for the global financial environment.
Sample Solution – Complexities of the U.S. Financial System
The United States financial system has many complexities and it is believed to be influenced by several environmental factors such as the economy and federal regulations. These factors affect individuals, businesses and the economy. The effectiveness of today’s economic environment is attributed to the role of the U.S Federal Reserve, the Federal Reserve Chairman and the Board. Interest rates and exchange rates are the complexities of the U.S financial system. These complexities impact the U.S as well as the global financial environment.
The U.S financial markets play the role of directing the flow of investments and savings in the economy. This way, these markets facilitate the production of goods and services and increase in capital. Producers and consumers in the market respond to the signs presented by the worth of returns and credit on investment. These signs encourage businesses and savers to direct funds to investors, businesses, governments and consumers. The international flow of funds between nations is also encouraged by the existence of healthy financial markets and institutions. Additionally, these financial markets and institutions help in lowering search and transaction costs in the economy. Financial markets provide a wide range of financial products with fluctuating maturity, pricing structures and risks which match the needs of lenders and borrowers. The government, businesses and individuals who are in need of capital can select the financial institution that offers funding to borrowers at the best rates. Thus, investors are able to compare financing costs on the basis of the anticipated return on investment, thereby enabling them to make the best investment choices (Federal Reserve Bank of New York, 2006).
The United States Federal Reserve is the state’s central bank and it regulates the banking system. In addition, it influences money and credit conditions in the economy with the aim of stabilizing prices and employment. These roles are important to the payment system of the United States as the Federal Reserve provides banking services to the twelve Federal Service Banks through the depository institutions and the federal government. Eventually, the depository institutions help in maintaining accounts by providing various payment services and transferring funds. The Federal Reserve Chairman is important to today’s economy because he oversees the functions of the Federal Reserve and is recognized as the holder of a very prominent position on the monetary policy of the nation. The chair is a person of very high ethical morals and standards and must have the confidence and trust of the president, Congress and bank officers, the general public, business leaders and foreign officials. The Federal Reserve Board supervises and regulates certain financial institutions and their activities. The Board is important in today’s economy because it helps ensure that consumers receive fair treatment and adequate enough information about their businesses in the banking system (The Board of Governors of the Federal Reserve System, 2003).
Low interest rates increase prices of the residential property thereby stimulating taking recourse to mortgage credit. This leads to a negative fiscal shock. For instance, the negative fiscal shock in the U.S in early 2014, was caused by the renewed political deadlock over public budget negotiations. Low-interest rates also increase inflation in the global economy thereby reducing the value of money. For instance, the Global Financial Crisis that began in 2008. Exchange rates may impact business’ decisions to operate in the foreign markets. For instance, high exchange rates attract more investors while low exchange rates discourage investors (Danthine, 2013).
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