FIN 100: Principle of Finance
Finical markets in today’s world are interlinked and complicated. These complicated interlinked economic markets have a great impact on people’s everyday lives. The Federal Reserve commonly known as the FED as well as interest and exchange rates has a great effect the global economy.
The finical market in the United States is a complex interlinked market that consists of three major sections; agriculture, industry and services. According to the CIA World Fact book the U.S. economy and gross domestic product or the monetary value of a nation’s goods and services depends largely on services (79.7%). (www.cia.gov). This service based economy effects U.S. based markets which in turn affects many aspects of people’s lives. When the U.S. market slows down there is less confidence in the finical markets. This in turn causes a change in business’s operations. This change is usually represented with reactions of business’s becoming more conservative in their fiscal spending. When organizations tighten their fiscal spending as a reaction to a slowing market then they do not tend to spend as much money or invest. This reaction in turn causes individuals who see this and in turn tend to spend less as well. This conservative economic stance leads to a less active market that slows down the economy. This cycle is observed and managed by the U.S. Federal Reserve.
The Federal Reserve or the FED has a large impact on the economy in both its day to day operations as well as long term effects. The FED manages the economic atmosphere within the United States and tries to promote growth. The FED accomplishes this by imposing regulations on market trading as well as how banks operate. The FED is headed by a committee which is chaired by Mr. Ben Bernake. Mr. Bernake as well as the other board members have many tools that help them to manage the economy (www.federalreserve.gov). For example the FED manages the interest rates. As of now interest rates are low to promote lending within the United States because of the current recession. This tool that the FED uses affects not only banks and the market, but common people as well. This is due to the fact that if rates are low for borrowing then banks can afford to borrow, which in turn allows people afford to take out loans as well. When people take out loans at a lower rate they are spending money which stimulates the economy. Another item to note is that these people can afford to pay back these loans at a low interest rate. This is just one of tool the FED uses that helps the economy today. Other policy tools according to the FED’s website are open market operations, discount rates, reserve requirements, term asset-backed securities loan facility and term deposit facility (www.federalreserve.gov). All these have a certain affect on the economy when used. These affects also influence global markets.
The United State’s economy is intertwined with international markets. Interest rates as described above also affect the global economy. For example oil is traded on the U.S. dollar (USD). Depending on how the USD is doing compared to other currencies worldwide influences the price of oil. Oil is also traded on speculation. Using this information and applying it to today’s economic downturn and the FED decides to lower rates to try to stimulate the economy then the price of oil does not fluctuate too much. This helps to stabilize the price of oil. Sense oil is a widely used substance that many nations rely on it has a huge affect on the global economic environment. This is one of many ways of how interest rates in the United States influence the global economical environment.
In discussing the global economic environment above it was mentioned on how the USD compared to other currencies. These exchange rates are important to note because it...
Cited: http://www.federalreserve.gov/, accessed 27 July 2013
http://www.xe.com/, accessed 27 July 2013
http://www.cia.gov/library/publications/the-world-factbook/geos/us.html, accessed 27 July 2013
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