1. Financial markets play vital role in accumulating capital and in production of goods and services in a given economy. Reports indicate that credit price and the returns on investments give market signals to participants in the financial market and that these signals help to direct funds to businesses, consumers, the government and the investors who may be interested in borrowing money by actually connecting those willing to lend and those who value money highly and so would like to borrow and invest it. Information available from www.frbsf.org shows that financial markets lower the search and the transaction costs in the US economy. They are also known to offer the market participants products by providing the borrowers and lenders a close match of their respective needs.
2. The US federal reserve is a very important banking institution in the economy of the United States and so the world at large. The Federal Reserve, its chairman and the board collectively play vital roles that have kept the United States economy at number one in the world. The Federal Reserve serves as a bank for the government by acting as fiscal agents, checking the treasury and redeeming the US government securities. For the depository institutions, the reserve maintains and provides various payment services like collecting cheques, EFTs, distributing and receiving currency and coins.
The chairman is the head of the banking system in the United States and also acts as the executive officer of the board of governors or the federal open market committee (FOMC) (Alessi, 2012). The chairman also serves on several international financial institutions’ boards representing the interests of the US government and reports twice to the congress annually to give the status of the economy (www.dummies.com).
Meanwhile the FOMC analyses the domestic and international monetary and economic issues. They regulate about 900 state member banks in the United States and around 5,000 holding companies. According to various reports in the US, the FOMC exercises responsibility in payment system and also administers consumer protection laws in the country.
3. When interest rates are low in an economy, they lead to more in consumption. People buy cars and homes for example. With more homes, there is increased demand for home items like furniture and appliances which in turn provide a boost for the entire economy. According to www.infotrak.com, this means people shall spend less on costs of interests therefore sparing enough income to spend on goods and services. This makes life easier for farmers, manufactures because they can borrow and invest in equipment, buildings and inventories. Meanwhile when the rates are high, people can save more because of a high incentive but they may also spend more because they feel richer.
4. Interest rates play a big role in the direction and flow of finances all over the world. They can for example affect the value of the dollar against other economies. When the real interest rate in the United States is higher than interest rates in other countries, then there foreign investment in the US to take advantage of higher returns. This in turn leads to increase in demand for the dollar and so leads to high exchange rate. Information available at www. Infotrak.com, show that the reserve is true when the interest rate in United States is lower than for other countries.
References
Alessi C (2012). Role of United States Federal Reserve. Retrived from www.cfr.org/international-finance/role-us-federal-reserve/p4020
Educational Resources (2005). Ask Dr. Econ. Retrieved from www.frbsf.org/education/activities/drecon/2005/0501.html. Accessed on 1st May 1, 2013
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www.infotrak.com/financial-Article/how-Do-Interest-rates-att-70.html
