Complexities of the U.S. Financial System
Vicki Cooley
Joseph Arbeiter
Principles of Finance

Complexities of the U.S. Financial System
Vicki Cooley
“A financial market is a market in which individuals and businesses are given the opportunity trade financial securities, commodities, and other fungible items of value at low costs and at prices that reflect the current supply and demand. Securities include stocks and bonds. Commodities include precious metals or agricultural goods.”
There are both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded). Markets work by placing many interested buyers and sellers, including households, firms, and government agencies, in one "place", thus making it easier for them to find each other.”
“The U.S. Federal Reserve plays the role of controlling inflation by managing credit, the largest component of the money supply. The Federal Reserve has the power to restrict credit by raising interest rates and making credit more expensive. This process reduces the money supply, which curbs inflation.”
“The Board of Governors, or Federal Reserve Board, is the controlling body of the U.S. Federal Reserve. The Federal Reserve Board, made up of 7 members appointed to staggered 14-year terms. The Board is allowed by both the executive and legislative branches of government to operate with a great deal of independence. The Board is in charge of overseeing the policies that regulate the commercial banking system and plays an important role in setting monetary policy. “The Board also regulates financial institutions rights to protect consumer credit through the Truth in Lending Act, Equal Credit Opportunity Act, Home Mortgage Disclosure Act, and Truth in Savings Act.”
“The Board is responsible for supervising the activities of the 37 Federal Reserve Banks, as well. The 12 Federal Reserve District Banks have a fair degree of autonomy within their districts in terms of supervising commercial banks, conducting research, hiring employees, etc. However, they must abide by Federal Reserve Board guidelines and policies.” http://www.federalreserveboard/boardmembers
“Changes in interest rates can have both positive and negative effects on the U.S. markets. When the Federal Reserve Board (the Fed) changes the rate at which banks borrow money, this has a ripple effect across the entire economy.”
How Interest Rates Affect Spending
“Every time a lender makes a loan, there is a possibility that the borrower will not repay the money. Lenders are rewarded for taking this risk with interest. Interest is the amount of money that lenders earn when they make a loan that the borrower repays, and the interest rate is the percentage of the loan amount that the lender charges to lend money.”
“The existence of interest allows borrowers to spend money immediately, instead of waiting to save the money to make a purchase. The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars.” When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy. Businesses and farmers also benefit from lower interest rates, as it encourages them to make large equipment purchases due to the low cost of borrowing.” (How Do Interest Rate Cuts Affect Consumers?)
“Conversely, higher interest rates mean that consumers don't have as much disposable income and are forced to cut back on spending. When higher interest rates are coupled with increased lending standards, banks make fewer loans. This affects not only consumers, but also businesses and farmers, who cut back on spending for new equipment, thus slowing production and reducing the number of employees.” (How Much Influence Does The Fed Have?) | | “Changes in currency exchange rates. When the exchange rate between the foreign currency of an international investment and the U.S. dollar changes, it can increase or reduce your investment return. Foreign companies trade and pay dividends in the currency of their local market. When you receive dividends or sell your international investment, you will need to convert the cash you receive into U.S. dollars. During a period when the foreign currency is strong compared to the U.S. dollar, this strength increases your investment return because your foreign earnings translate into more dollars. If the foreign currency weakens compared to the U.S. dollar, this weakness reduces your investment return because your earnings translate into fewer dollars. In addition to exchange rates, you should be aware that some countries may impose foreign currency controls that restrict or delay you from moving currency out of a country.” http://www.sec.gov/investor/pubs/ininvest.htm | | | | | | | References | Groz, Marc M. (2009): Forbes Guide to the Markets, John Wiley & Sons, Inc., New York | |
Valdez, Steven An Introduction To Global Financial Markets, Macmillan Press Ltd. http://www.federalreservesystem.gov/boardmembers http://www.investopedia.com/articles/How Interest Rates Affect the U.S. Markets/(How Do Interest Rate Cuts Affect Consumers?/ (How Much Influence Does The Fed Have? http://www.sec.gov/investor/pubs/ininvest.htm