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Complexities of the U.S Financial System

There are several complications in the U.S financial system. Generally, financial system is influenced by many environmental factors, which include the government regulations and the overall economy. The economy, businesses and individuals are affected by the financial markets in different ways. The U.S financial market not only impacts the U.S economy but it also affects the international economy directly. One of the major effects of the U.S financial market on the economy, businesses, and persons is facilitating the effective flow of cash and investments within the economic environment. This helps in increasing capital and boosting the production of commodities and services. Properly developed financial markets and institutions create a favorable environment for lenders and borrowers. A combination of these factors and a variety of financial products and tools have a positive impact on the overall economy.

The value of credit and proceeds from investments shows the state of the economy. These indications help businesses and investors in making decisions about directing their resources to individuals, corporations, governments, and other investors. Similarly, the presence of strong financial markets and institutes helps to facilitate the global flow of cash between nations. Furthermore, effective financial system decreases the cost of searching for products and makes transactions in the world market affordable. By offering a wide range of financial instruments and products, a well-developed financial market gives investors and borrowers a good opportunity to get their needs. As such, the U.S financial system assists businesses, individuals and the government to determine the financial institutions and markets that can provide funding and how much they are likely to pay back (Sarno & Taylor, 2005).

The responsibility of the ‘U.S. Federal Reserve’, the ‘Federal Reserve Chairman’, and ‘the Board’

The United States’ Federal Reserve, the Federal Reserve Chairman, and the Board play a very significant role in the U.S economy. First, they save large financial institutions from failing. The U.S Federal Reserve, the Federal Reserve Chairman, and the Board use eccentric services in loaning to ensure that the global economy does not collapse. To clarify this, it is important to recall reasons for creating the Federal Reserve. From 1837 to the year 1913, there was no central bank in the United States. During the period, the U.S banks implemented a lot of dishonest banking practices. In most cases, businesses were ill-managed and there was no regulation. The necessity for the central bank became apparent following the banking anxiety of 1907. It was then that the “Federal Reserve act of 1913” was enacted.

The major role of the Federal Reserve is to build a strong economy and to ensure that financial institutions have enough reserves for everyday operations. To achieve this, the Federal Reserve provided a currency in form of securities. This helps to ensure that transactions are made transparently by both banks and their clients. These bodies also act as federal financial manager. They supervise banking institutions and control the economy as well as the international cash flow, contributing greatly towards the efficiency of the present-day economic system (Madura, 2007).

Even though the U.S Federal Reserve, the Federal Reserve Chairman, and the Board try to achieve these objectives, they have not been very effective. The major failure was witnessed during the financial crisis that happened between the year 2007 and 2008. According to economists, this was the worst economic crisis from the time of the ‘Great depression’ of 1930. It risked a complete failure of large financial institutions. It also caused the government to intervene and supply funds to most banks. Also, it resulted into depressions in stock markets internationally.

How interest rates influence the U.S. and global financial environment

The availability of interest enables borrowers to spend cash sooner rather than saving to spend in future. Low interest rates allow individuals to borrow more money and to spend more. Again, low interest rates provide more to be spent by consumers. This creates a wave of increased expenditure all through the economy. Low interest rates also encourage manufacturers to make large products because of low borrowing cost. There are indicators used by Federal Reserve to manage inflation rates. Any rise by over 3% causes Federal Reserve to increase federal funds rate to control increasing rates. Consequently, borrowing costs rise and spending decreases resulting into low demand for commodities and services. This interferes with businesses not only in the U.S but also internationally. Conversely, when interest rates are lowered, spending increase and the economy gets boosted. A clear illustration happened between 2001 and 2002, when the Federal Reserve lowered the rates to 1.25%. It immensely resulted to the financial recovery of the year 2003 (Bernanke, 2013).

How exchange rates may impact a business’s decision to operate in foreign markets

Exchange rate influences the cost of doing business in a foreign market. When a foreign currency becomes stronger against the U.S dollar, it makes the cost of exports from that country to the U.S expensive. This might affect the cost of trade and between the U.S and that country. Thus, corporations may opt for an alternative country with lower exchange rate since the cost of doing business is lower.

References

Bernanke, B. (2013). The Federal Reserve and the financial crisis. Princeton: Princeton University Press.

Madura, J. (2007). Introduction to business. Mason, OH: Thompson/South-Western.

Sarno, L., & Taylor, P. (2005).The economics of exchange rates. Cambridge: Cambridge University Press.