Assignment 1: Complexities of the US Financial System
Describe how the US financial markets impact the economy, businesses, and individuals.
US financial markets play an important role in contributing to the health and efficiency of the economy, businesses, and individuals. (Spiegel, 2002) Because there is a strong relationship between the health of the economy and financial market development and economic growth, even a slight dip in the financial markets can radically effect how the economy, businesses, and individuals respond. (Ask Dr Econ, 2005) Financial markets “facilitate the raising of capital in the capital markets, the transfer of risk in the derivatives market, price discovery, global transactions with integration of financial markets, the transfer of liquidity in the money markets, and international trade in the current markets.” (Financial Markets, 2013) When the financial markets are doing well, “firm-level, industry-level, and cross-country studies all suggest that the level of financial development exerts a large, positive impact on economic growth.” (MIT, 2001)
When financial markets are not doing well, interest rates on loans will increase and access to credit decreases. Interest rates are higher because of the risk that banks feel are involved. In times of high risk, interest rates go up. It is a way for banks to limit their losses and make as much money back – just in case a default occurs. So those businesses that are able to get credit are finding that it is more expensive than it used to be. Many companies need credit – loans – in order to sustain day to day operations. When the financial markets are in upheaval, and there is concern about lending, businesses have trouble getting the capital they need to keep running because banks are reluctant to lend to businesses, due to the fact that so many businesses, large and small, have failed. (Highland) This causes businesses to increase prices because operating costs are higher. In...
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