November 5, 2014
Intro To Finance
We are going to discuss the complexities of the U.S. financial system in today’s economy. We will also discuss the impact the financial markets have, not just on the economy, but on businesses as well, also touching on the influence of interest rates on U.S. and global financial environment and give a few examples of such influences.
U.S. Financial Markets impact on the economy One reason financial markets effect our economy is because they are a major part of our financial system that facilitates the transfer of financial assets among individuals, institutions, businesses, and governments. These financial assets can help build roads, bridges or provide added services to the people by the issuing or selling of debt securities (Melicher & Norton, 2012). Financial markets are the middle man between savers and borrowers by being the mechanism for allocating those financial resources. Without the financial markets, in which there are four major types debt securities markets, equity securities markets, derivative securities markets and foreign exchange markets, the financial system wouldn’t be as efficient, thus putting our economy in a decline (Melicher & Norton, 2012).
U.S. Financial Markets impact on business Businesses are directly impacted by the financial markets largely due to investments. If these small businesses or startup businesses or even large companies have no one investing in them, buying shares, then they can’t grow. If there is no growth, there’s no profit and they can’t keep up with the demand of the environment in which they operate. Market analysts have long viewed the rise and fall of a company’s share price as a gauge of the market’s expectations about the firm’s future cash flows. But the price can also reflect approval or disapproval of management decisions, and it can therefore affect what decisions are made, which can include the shutdown of a business (Goldstein, 2012).
Interest Rates influence U.S. and Global Financial Environment Interest rates has a direct effect on the U.S. and global financial environment because they depend on the fluctuation of interest rates at that time, lenders can be more willing to supply funds to borrowers as long as the lenders can earn a good return on their loans. Also making borrowers demand funds from lenders as long as they can invest the funds so as to earn a satisfactory return above the cost of their loans (Melicher & Norton, 2012, p. 180). This also applies to banks borrowing from other banks, with the fluctuation of interest rates, the economy can speed up or slow down accordingly.