Complexities of the U.S. Financial System

Complexities of the U.S. Financial System

Financial market and economic growth nexus is undisputed by economic scholars. There is evidence of a strong causal between economic growth and financial market development; this is anchored in the cross country studies which have revealed that financial market development has a large impact on economic growth. In the United States, financial market has a role of controlling the flow of savings and investment, thus facilitating capital accumulation and increased output (Demirgüç-Kunt, A. 2001).

On the same note, the US financial market has a significant role in the stability of the financial sector, which plays a significant role in creating an enabling business environment. As the financial markets develop, the economy continues to accumulate more capital goods and the production of goods and services are also improved. With well developed financial market, the cost of search and transaction of business products is low, thus improving the business environment (Demirgüç-Kunt, A. 2001).

A well developed financial market also plays a significant role to individuals. It provides a variety of financial products from which individual can choose. This is achieved by providing sufficient information to the borrower on expected returns to investment hence enables an individual to make sound decisions (Demirgüç-Kunt, A. 2001).

Question two

The Federal Reserve is the central bank of the United States, commonly referred as the Feds. It plays an important role in the macroeconomic environment of the United States by using the monetary tools to regulate the activities of the economy. This role is especially critical in maintaining the financial stability in the US economy. The Federal Reserve is also mandated to regulate all financial institutions in the United States and protect the consumers against exploitation. In addition, the Federal Reserve is mandated to perform financial transactions on behalf of the government, especially operating and managing the international movement of money (Axilrod, 2013).

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