Back to School Offer

Get 20% of Your First Order amount back in Reward Credits!

Get 20% of Your First Orderback in Rewards

All papers examples
Get a Free E-Book! ($50 Value)
HIRE A WRITER!
Paper Types
Disciplines
Get a Free E-Book! ($50 Value)

Complexities of the U.S. Financial Systems, Research Paper Example

Pages: 3

Words: 688

Research Paper

Although the U.S. financial system has numerous roles in the economy, its central role is arguably the efficient allocation of capital between savers and borrowers. The financial system strives to efficiently channel capital (investment) from savers to borrowers who may invest the capital in business. “Savers” in the economy can take different forms such as individuals (wage earners), companies, and pension funds. “Users” of capital in the economy can also take different forms including entrepreneurs and firms.  Thus, US financial markets consist of many different actors and markets that all work together to ensure efficient allocation of limited capital resources.

The U.S. Federal Reserve, typically referred to as “Fed”, plays an important role in the governance of the nation’s capital markets. The Fed performs many key functions including setting interest rates, regulating market participants, and being a steward of monetary policy.  Most of us are aware of the Fed because of its role in setting interest rates. Fed conducts roughly 9 meetings during the year (including emergency meetings) during which it decides whether to raise, lower, or leave interest rates unchanged.  This decision is based on a number of factors including the general health of the national economy and specifically, the nation’s unemployment rate.  Although the Fed also has a broader mandate to ensure the health of the nation’s banks and other capital market firms, investors primarily pay attention to it due to its role in the interest rate policy (Investopedia, 2011).

The Federal Reserve Chairman, currently Ben Bernanke, is the executive in charge of the Fed (The Federal Reserve Board).  The President of the United States nominates (or renominates) the Federal Reserve Chairman on a five-year basis. Once nominated by the President, the US Congress then either approves or disapproves of the candidate through the voting procedure.  The Federal Reserve Board essentially serves as a “braintrust” with which the Federal Reserve Chairman consults regarding the promulgation of monetary policy. The Governors of the Federal Reserve Board are also in charge of running the Fed branches located throughout the country to monitor economic activity and vote on measures to change interest rates.  Although there is a (somewhat eccentric) strand of economic thought that opposes central banks, most economists generally believe that the Fed is a good idea.  Not only does the Fed monitor the economy and adjusts interest rates so as to promote economic activity and keep unemployment as low as possible, it also plays key roles in the regulation of banks and other capital market actors.  Despite this, there is still ample room for criticism of the Fed’s performance: Many attribute the 2007-2008 financial crisis to overly accommodative interest rates (Taylor, 2009) that caused an asset bubble in the housing and equity markets; the Fed did not move quick enough to increase interest rates once economic activity had picked up.

Interest rates play a key role in helping investors and firms decide what to do with their money.  Indeed, one can think of interest rates as a piece of information. If interest rates are high, investors may save their money in order to get a higher return and businesses may refrain from investment due to the punitive cost.  If interest rates are low, investors may choose spending money over saving money while firms may choose aggressively investment in projects due to lower interest costs. Thus, interest rate policy plays a key role in either promoting economic activity or dampening economic activity from occurring.

Finally, exchange rates are pivotal consideration for businesses wanting to do business abroad. Even though a business may have operations in many different locations (countries), they ultimately must declare financial performance in their home currency. Thus, if there are volatile currency movements, this can have a deleterious impact on a firm’s bottom line. All firms are aware of this risk, and they attempt to “hedge” risk in order to deal with it.

References

Investopedia. (2011, September 6). How Interest Rates Affect The U.S. Markets. Retrieved May 03, 2013, from http://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp

Taylor, J. B. (2009, February 9). How Government Created the Financial Crisis. Retrieved May 3, 2013, from http://online.wsj.com/article/SB123414310280561945.html

The Federal Reserve Board. (n.d.). Board Members. Retrieved May 3, 2013, from http://www.federalreserve.gov/aboutthefed/bios/board/bernanke.htm

Time is precious

Time is precious

don’t waste it!

Get instant essay
writing help!
Get instant essay writing help!
Plagiarism-free guarantee

Plagiarism-free
guarantee

Privacy guarantee

Privacy
guarantee

Secure checkout

Secure
checkout

Money back guarantee

Money back
guarantee

Related Research Paper Samples & Examples

Bipolar Disorder and Marriage, Research Paper Example

Abstract Bipolar disorder, a mental illness also known as manic depression and characterized by violent mood swings, ruins 90 percent of marriages in which one [...]

Pages: 6

Words: 1566

Research Paper

Substance Use and Abuse Assignment, Research Paper Example

Substance use, abuse and the delicate balance between them compose a multidimensional issue that has been extensively researched because it is associated with a plethora [...]

Pages: 12

Words: 3301

Research Paper

Jonathan Swift and Satire in His Works, Research Paper Example

Introduction Jonathan Swift is one of the most remarkable British writers of the 17th and 18th century. He is well known for his works like [...]

Pages: 7

Words: 1969

Research Paper

Opportunity and Cost: Business Prospects Made Possible by NAFTA, Research Paper Example

NAFTA – North American Free Trade Agreement – is a trilateral trade bloc in North America created by the governments of the United States, Canada, [...]

Pages: 8

Words: 2159

Research Paper

Stimulus Plan 2009, Research Paper Example

With the U.S. economy experiencing disorder and chaos, there have been many debates concerning the 2009 economic stimulus plan. The stimulus plan in question, also [...]

Pages: 4

Words: 1234

Research Paper

A Legitimate Use of Stem Cells, Research Paper Example

Nowadays, a problem of legitimate use of stem cells is largely discussed. Controversy regarding this issue has long history and does not seem to be [...]

Pages: 12

Words: 3194

Research Paper

Bipolar Disorder and Marriage, Research Paper Example

Abstract Bipolar disorder, a mental illness also known as manic depression and characterized by violent mood swings, ruins 90 percent of marriages in which one [...]

Pages: 6

Words: 1566

Research Paper

Substance Use and Abuse Assignment, Research Paper Example

Substance use, abuse and the delicate balance between them compose a multidimensional issue that has been extensively researched because it is associated with a plethora [...]

Pages: 12

Words: 3301

Research Paper

Jonathan Swift and Satire in His Works, Research Paper Example

Introduction Jonathan Swift is one of the most remarkable British writers of the 17th and 18th century. He is well known for his works like [...]

Pages: 7

Words: 1969

Research Paper

Opportunity and Cost: Business Prospects Made Possible by NAFTA, Research Paper Example

NAFTA – North American Free Trade Agreement – is a trilateral trade bloc in North America created by the governments of the United States, Canada, [...]

Pages: 8

Words: 2159

Research Paper

Stimulus Plan 2009, Research Paper Example

With the U.S. economy experiencing disorder and chaos, there have been many debates concerning the 2009 economic stimulus plan. The stimulus plan in question, also [...]

Pages: 4

Words: 1234

Research Paper

A Legitimate Use of Stem Cells, Research Paper Example

Nowadays, a problem of legitimate use of stem cells is largely discussed. Controversy regarding this issue has long history and does not seem to be [...]

Pages: 12

Words: 3194

Research Paper

Get a Free E-Book ($50 in value)

Get a Free E-Book

How To Write The Best Essay Ever!

How To Write The Best Essay Ever!