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Complexities Of The Us Financial System

993 words - 4 pages

The U.S. financial system has many complexities and it is impacted by several environmental factors including federal regulations and the economy. The U.S. financial markets impact the economy, businesses, and individual by the movement of funds among financiers, businesses and governments. It involves investments in the area of sales or marketing of securities, the management of investment risk through portfolio diversification and the analysis of securities. Melicher, R. W., & Norton, E. A. (2011).Pg. 6
The U.S. Federal Reserve is the central bank of the United States and is responsible for regulating the banking system, setting monetary policy by influencing money and credit ...view middle of the document...

Melicher, R. W., & Norton, E. A. (2011). Pg. 86
The U.S. Federal Reserve, the Federal Reserve Chairman and Board are effectiveness in today’s economic environment; because, it uses three tools of the monetary policy discount rate, open market operations, and the reserve requirement to influence the supply and demand for reserve balances of commercial banks at the central bank, and in this way modifies the federal funds rate. The federal funds rate is the interest rate at which bank loan their spare reserve balances at the Federal Reserve to former banks that have reserve lower than the system’s requirements. The Federal Reserve Open Market Committee (FOMC) sets an objective for the federal fund rate, but the market decides the actual rate itself. ("How much influence," 2013)
When the Federal Reserve open market purchase increases the reserve supply, it causes the federal funds rate to fall. A higher interest rate makes it eligible for depository institution to be charged to borrow short-term funds directly from the central bank. This will discourage banks from borrowing from the central bank, decreasing the reserve supply and cause the federal funds rate to rise. Lower reserve requirements decrease the demand for reserves and can cause the federal fund rate to fall. ("How much influence," 2013)
When there is a change in the federal funds rate it triggers a chain of events that affects other short-term interest rates, long-term interest rates, foreign exchange rates, the amount of money and credit and ultimately, a range of economic variables including, output and prices of goods and services; although, the Fed can’t control inflation or influence output and employment directly it can put tools in place to help the economic. ("How much influence," 2013)
The exchange rate may impact a business’s decision to operate in a foreign market; because, it affects the value of products and financial instruments. The exchange rate also impacts a nation’s...

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