Macroeconomics is an important aspect of the economy and, therefore, falls under a subject of interest to anyone in the field of business. It is out of the spheres of macroeconomics that one can be able to understand fully how the market functions. The aspect of the financial market is part and parcel of the economy and ought to be tracked and adjusted where necessary. The country’s interest rates, inflation rates, federal government budget, the balance of payment, economic growth, and fiscal policy are the frequently discussed topics in macroeconomics. These aspects are crucial in the boosting of the economy, and, on the one hand, if they remain on track, the United States of American’s economy will thrive. On the other hand, when these elements are negatively affected, the economy is likely to decline even to a level of recession. The research seeks to explore the aspects of macroeconomics. The work captures the financial markets and their functions, financial intermediaries and their roles, the federal deficit and national debt, consumers and dealing with risks, the concept of a dollar received today is worth more than a dollar received tomorrow, present and future value of money as well as the calculation of the compound interest.
Macroeconomics is a broad area of the discipline of economics. It addresses the concepts dealing with the national economies in the entire world. People of all walks of life interact in the financial market through financial intermediaries the function of which is to link the participants to the market enhancing thus economic growth (Center on Budget and Policy Priorities, 2016). Governments are also in competition as they work towards the improvement of their countries’ economies. In so doing, they may fall short of the resources in financing the projects in the budget, and this is when they borrow from other entities, and this cumulative borrowing is what determines their debt and hence their competitive edge on the rest of the world. This work seeks to examine some issues in macroeconomics.
A financial market is a platform that allows the trading of financial assets. Previously issued financial assets are exchanged with the help of both borrowing and lending within the financial market. Financial markets, therefore, facilitate the flow of capital with the purpose of making financial investments by cooperation, individuals, and governments. Examples of such institutions include the U.S. government bond market, New York Stock Exchange as well as the U.S. Treasury bills auction. Financial markets perform three primary economic functions. Price discovery is the first role. It is presented in transactions between sellers and buyers of financial instrument determining the traded assets’ prices. Liquidity is another function of the financial market that allows an investor to sell a financial instrument at fair market value all the time. Without this aspect, the investor would be compelled to hold the tool until the condition arises for him/her to sell. The last function of the financial market is the transaction cost reduction. Whenever the market participants make a transaction, the transaction fee is charged, and this helps in the growth of the economy.
Financial intermediaries are unique financial entities that carry out the efficient allocation of funds whenever there are barriers that limit the investors and lenders from accessing the borrowers in the commercial market. Examples of financial intermediaries include insurance companies, pension funds, regulated investment companies, insurance companies, investment banks, and depository institutions. Financial intermediaries perform critical functions in the financial market. The first role is the receiving of funds from the investors and the lenders. Their second function is investing or lending those allocated funds to those who are in need of them. Financial intermediaries also offer brokerage services, help in the creation of financial markets, and distribute the allocated resources among the participants of the latter on behalf of their customers. They manage the financial assets of clients as well as offer financial advice to individuals and businesses and provide a payment mechanism.
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The deficit is the amount of money lacking in the government budget. This is to means that revenue collected by the government fails to meet the budget expenses within a financial year, and thus the government is left with a shortage of resources. According to the Center on Budget and Policy Priorities (2016), $438 billion was the budget deficit in the year 2015 which translated to approximately 2.5% of the United States’ Gross Domestic Product. It is below the significant level experienced in the aftermath of the Great Recession (Center on Budget and Policy Priorities, 2016). Unlike the federal deficit that requires annual borrowing, the national debt it the actual cumulative amount that the government has been borrowing over the years since the existence of the state. This means that when the government faces a situation of a deficit, it increases the national debt, and in the case of a surplus, the national debt is reduced. Two measures apply in the calculation of the national government debt. The net debt is the debt held by the public. This shows the government borrowing from foreign governments, investors, and banks where, for instance, $13.1 trillion is the debt held by the public at the end of 2015 (Center on Budget and Policy Priorities, 2016). The second measure is the gross debt which includes the treasury issued securities in government trust funds plus the debt held by the public. A budget deficit can affect the economy negatively since when there is a shortfall, the economy weakens, and the income of the citizens declines meaning that the government will collect less revenue, and thus it has to borrow to meet its budget demands.
Risk aversion is the behavior of venturing in the riskless businesses that promise positive returns unlike risking by probability. Consumers are in search of guaranteed outcomes, and their risk aversion level is determined by three main factors (Mandrik & Bao, 2006). The choice dilemma is a crucial challenge that makes them reluctant to take the risk. For example, if consumers have some pressing issues at home, they feel that they ought to meet the family demands before they can risk. The second factor is the attitude towards investment. In the case of gambling, consumers will tend to flood the market when the bet is labeled as high avoiding thus speculative risk. However, they will be risk alert when the bet has marked a loss, and, therefore, a really dangerous situation arises. Perception is the other factor that contributes to consumer risk aversion. Consumers perceive themselves to be the beneficiaries of the end product, and thus they see no need to lose their resources at the expense of those who are experts in that area of production. The first method of dealing with risk among the consumers is by the government ensuring stability in the economy since most users are forced to reserve their little resources in times of economic crisis. Secondly, the emotional feelings that come with sentiments can contribute towards the consumer’s decisions and, therefore, the sentiments should be framed in a positive manner so that the users see it as an opportunity to profit.
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The phrase that a dollar received today is worth more than a dollar received tomorrow means that the money available today has a greater value over time as compared to its value in the future. It is based on the fact that money makes money, and the earned money makes more money. It is, therefore, more viable to have a dollar today and invest it to generate more in the future through interests, dividends, and other capital appreciations rather than waiting for the same amount of money in the future that will not have depreciated due to numerous economic conditions experienced over time (Margulis, 2015). The importance of a dollar today in the economy is that investors will invest it and help in the growth of the economy unlike having dead money that does not serve the purpose of adding value to the country’s economy. This idea is the premise as to why the public is always encouraged to bank the money so that they can earn interest as a result of the potential investors borrowing that money to invest in various sectors.
The difference between the current value and the future value of money is that money available today can be invested to generate more money. For instance, if one was to be given $ 100 today, he/she would invest it in the interest of, for example, 10% per annum, and at the end of the year, he/she will have a value of $108. If the same money was to be delayed and one was to be given a year, they would have lost a potential $8 addition to the principle. Thus, the present value of a future sum of money is discounting. It is a calculation of the amount to be invested today to attain a certain amount in the future. Future value of the present sum of money is compounding, and it calculates the possible amount of money to be gained in the future regarding the one already invested today (Margulis, 2015). It helps in injecting more money into the economy and thus helping it to avert any impending financial crises. It also contributes to enhancing the competitiveness of the country among the rest of the world.
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Compound interest is calculated based on a fixed formula that shows an interaction of time regarding years or parts of a year, the rate regarding percentage, and the initial amount invested called the principle. According to Margulis (2015), FV=PV (1+r) n where FV is the future value, PV is the present value, (r) is the rate, and (n) is the time. By using the formula, $2,000=$1,000(1+0.06)n, where time (n) is 12 years will bring a total amount of $2,012.20. However, the sum will, therefore, double after 12 years.
Conclusively, it is clear that the financial market is a platform that enhances trading of the financial assets among market participants in which the financial intermediaries are unique financial entities that carry out the efficient allocation of funds between the investors and the lenders in the financial market. The deficit is the amount of money lacking in the government budget, while the national debt is the cumulative amount borrowed by the government over the years. The consumer’s risk aversion is the behavior of venturing in the riskless ventures that promise positive returns unlike those which risk by probability. Future value of the present sum of money is compounding, while the present value of a future sum of money is discounting. Finally, it is possible to calculate the future value of money using the compound interest formula.