Macroeconomics Homework Questions

Written Assignment 3

1. What is the role of the financial system? Name and describe two markets that are part of the financial system in the U.S. economy. Name and describe two financial intermediaries.

Financial systems, financial intermediaries and financial markets, channel funds from those who have savings to those who have more productive uses for them. They perform two main types of financial service that reduce the costs of moving funds between borrowers and lenders, leading to a more efficient allocation of resources and faster economic growth. These roles are the provision of liquidity and risk management services.

The bond market is one of the most important financial markets in our economy. The bond is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. The bond is like a contract on a paper, with the maturity date and the rate in which it will be paid back to the buyers. The money that they get from the bonds can be used for something that the company needs to further the business and of course in the end should make the business more profitable and in return when the bond matures will be paid back to the purchaser with interest or either the buyer can sell at any time.

The second one is the stock market. The sale of stock is called equity finance. After the stocks are issued, by selling the shares to the public, they trade with stockholders in stock exchanges. Stocks are more of a risk than bonds but are potentially higher returns also. The price is determined by the supply and demand for the stock, or company. When there are negative things in the news about a particular company , it does change the price that people are willing to pay for a certain stock.

There are two financial intermediaries which are banks and mutual funds. An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds are called a mutual fund. The shareholder accepts...