Complexities of the U.S. Financial System
Joshua Curtiss
Strayer University
Professor Haroon Rasheed Baqai
Finance 100
24 July 2013

* Describe how the U.S. financial markets impact the economy, businesses, and individuals. The U.S financial markets impact the economy, businesses, and individuals by, helping to skillfully direct the flow of savings and investment throughout the economy in ways that facilitate the increase of capital and the production of goods and services. The worth of credit and returns on investment provide helpful signs to producers and consumers. These signs help direct funds from savers and businesses to the consumers, businesses, governments, and other type of investor. Also, the existence of healthy financial markets and institutions also accelerates the international flow of funds between countries, helping the local economy. In addition, efficient financial markets and institutions tend to lower search and transactions costs in the economy, with potential savings of millions per year. By providing a large range of financial products, with fluctuating risk and pricing structures as well as maturity a well-built financial system offers products to participants that provide borrowers and lenders with a close match for their needs. Businesses, individuals, and governments in need of capital can easily discover which financial institutions or which financial markets may offer a particular funding and what the cost will be for the borrower. This allows investors to compare the cost of financing to their anticipated return on investment, so they can make the correct investment choice that best suits their needs.

* Explain the role of the U.S. Federal Reserve, the Federal Reserve Chairman, and Board, indicating its effectiveness in today’s economic environment. Provide support for rationale.

The Role of the U.S Federal Reserve, the Chairman, and board is to ensure financial institutions that are too big to fail, do not, and to employ unconventional facilities in lending to make sure the world economy does not fail. The Federal Reserve acts as a fiscal agent for the government, and supervise depository institutions, and regulate the economic and global money supply. In the years between 1837 until 1913 the United States was without a central bank. During this time banks and their managers and owners abused their power and performed fraudulent banking practices. They often managed business poorly and made sure they were not regulated. The need for a central bank came after the banking panic of 1907, President Wilson signed into law the Federal Reserve act of 1913. The goal of the Federal Reserve was to create economic stability and insure banks have adequate capital for daily operations. In order to accomplish these goals, the Fed supplied the economy with fiduciary currency to make sure clear transactions were made by customers and banks themselves. (Ronald W. MelIcher, 2011)

• Explain how interest rates influence the U.S. and global financial environment. Provide support for explanation.
Changes in interest rates affect the public’s demand for goods and services mainly by altering borrowing costs, the availability of bank loans, the wealth of households, and foreign exchange rates, ultimately influencing the global financial environment. For example, a decrease in real interest rates lowers the cost of borrowing; that leads to more people buying homes and buying more expensive homes because they can afford more. In addition, lower real rates and a healthy economy may increase banks’ willingness to lend to businesses and individuals. This will increase spending, for borrowers who have few sources of credit other than banks. Lower real rates also make common stocks and other such investments more attractive than bonds and other debt instruments; as a result, common stock prices tend to rise. In the short run, lower real interest rates in the U.S. also tend to reduce the foreign exchange value of the dollar, which lowers the prices of the U.S.-produced goods we sell abroad and raises the prices we pay for foreign-produced goods. This leads to higher aggregate spending on goods and services produced in the U.S. by both local and foreign buyers. The increase in aggregate demand for the economy’s output through these different channels leads firms to raise production and employment, which in turn increases business spending on capital goods even further by making greater demands on existing factory capacity. It also boosts the local economy because people are buying things and people have jobs.

* Describe how exchange rates may impact a business’s decision to operate in foreign markets
On the marketing side, exchange rates can affect demand for business products at home and abroad. A country with a lower exchange rate may force down the value of its currency if its exports become too expensive owing to relatively high inflation. Even though inflation would cause the currency value of local products to rise, the devaluation means that it will take less foreign currency to buy the currency, thus allowing the countries products to remain competitive.

REFERERNCES

http://www.frbsf.org/us-monetary-policy-introduction/real-interest-rates-economy (Retrieved 20 July 2013) http://exporters-sources.com/business-implications-of-exchange-rate-changes (Retrieved 20 July 2013) http://www.federalreserve.gov (Retrieved 20 July 2013)
Introduction to Finance: Markets, Investments, and Financial Management, 14th Edition
Melicher, Ronald W., University of Colorado at Boulder; Norton, Edgar A., Illinois State University (Retrieved 20 July 2013)