Complexities of the US Financial System - Assignment Example

The paper “Complexities of the US Financial System" is a brilliant example of an assignment on finance & accounting. Financial markets are markets where agents buy and sell bonds, stocks, commodities, derivatives and foreign exchange. In addition, they are markets where enterprises go to increase cash to grow, investors make money and companies minimize risks.

Task 1
Financial markets play a major role in the health of an economy. They contribute by efficiently directing the liquidity of investment and savings in the economy in ways that enable the accumulation of assets and the production of services and goods. The mixture of well-developed financial markets, as well as a varied range of financial instruments and products, meet the needs of lenders and borrowers, and hence the general good economy (Saunders, 2000).

Financial markets can lead to a company’s collapse or development. Most companies invest in these markets with the aim of minimizing their risks as well as grow their money. However, if a financial market weakens, the effect is directly transferred to the business, which can lead to its collapse. However, if it grows stronger, the businesses gain more stability as the risks get reduced and at the same time their money increases (Saunders, 2000).

Financial markets can affect an individual directly or indirectly. For instance, a failing market will directly affect the economy of a country, which in turn will transfer its effect on the consumers by increasing the prices of goods and services offered (Saunders, 2000).

Task 2
The Federal Reserve's primary role involves managing the United States monetary policy, monitoring the systemic risk and regulating the bank holding companies as well as other member banks (Rotemberg, 2013). The team is effective in that it has delivered the state from the 2007/2008 financial crisis.

The Federal Reserve chairman acts as the face of the board, by testifying and elaborating to the Congress, twice every year, of what the board thinks of the current economy and the reasons for its every ongoing activity. Also, he maintains in contact with the President’s Council of a financial adviser (Rotemberg, 2013). The regular updates and contact with the advisers help to allow the state to know its economic status and seek and employ effective solutions in case of issues.

The Federal Reserve Board analyzes economic and financial growth, both internationally and domestically (Rotemberg, 2013). It is effective in that, its analysis help determines the next economic move by the state.

Task 3
Interest rates affect spending tendencies. Locally, if the interest rate is low, people prefer borrowing money to buy an expensive item than saving until the amount is reached. Consequently, it results in many people borrowing more money which increases the general spending in the overall economy. However, if the rate is high, they prefer saving for it, resulting in reduced spending within the economy. Internationally, low interests, makes many states take up various loans to finance their ongoing projects, which results in increased country expenditure. However, increased rates cause fewer loans, hence the spending is reduced (Shaw, 2009).

Increased rates influence inflation in that, increased interest rates translate to higher borrowing costs that make people start spending less. Consequently, the demand for services and goods will then reduce, which will make inflation fall. An example is during 1981-82 where inflation was at 14 percent pa. After the 20 percent interest rate raise, the country underwent a lethal recession. Globally, the reduced interest rates, especially on houses in the early 2000s, encouraged global trading and consequently resulted in the second-worst known global recession (Shaw, 2009).