Apply The Stock Market And The Economy Summary

Apply The Stock Market And The Economy Summaryassignment Content1

Research how financial markets and institutions influence the US and global economies. Create an 8- to 12-slide presentation or a 350- to 575-word summary to present your research. Choose four financial markets or institutions and briefly explain what each specializes in (such as mortgages, stocks, government securities, etc.). Compare how each financial market you identified influences the US economy and the global economy. Cite references to support your assignment, formatting your citations according to APA guidelines.

Paper For Above instruction

The interconnectedness of financial markets and institutions significantly influences both the United States and the global economy. These financial entities facilitate capital allocation, influence monetary policies, and impact economic stability and growth. This paper explores four key financial markets and institutions—equities (stocks), mortgage markets, government securities, and foreign exchange markets—and examines how each impacts national and international economic landscapes.

Equity Markets (Stocks)

The stock market is a public platform where company shares are issued, bought, and sold. It primarily represents ownership in corporations and serves as a barometer of economic health. The US equity market, exemplified by the New York Stock Exchange (NYSE) and NASDAQ, is among the largest worldwide. These markets influence the economy by impacting consumer confidence, investment levels, and employment. When stock markets perform well, households and businesses tend to feel optimistic, leading to increased spending and investment. Conversely, declines may trigger economic downturns, as seen during the 2008 financial crisis, which originated from a collapse in housing-related securities but was amplified by stock market crashes (Shiller, 2015).

Internationally, US stock markets influence global investors' decisions, as many foreign entities hold American equities or are affected by US economic policies. Market fluctuations can lead to capital flows across borders, affecting exchange rates and international investments. An example includes how the decline in US stocks in the early 2020s due to the COVID-19 pandemic caused volatility in global markets (Baker & Wurgler, 2019).

The Mortgage Market

The mortgage market comprises financial institutions that originate, buy, and securitize mortgage loans. It plays a vital role in enabling homeownership, which stimulates economic activity through construction, real estate, and associated sectors. The US mortgage market, managed by entities like Fannie Mae and Freddie Mac, provides liquidity to lenders and stabilizes the housing sector.

Its influence on the economy is profound: rising mortgage rates can dampen home sales and construction, slowing economic growth. Conversely, low mortgage rates, as seen in the 2010s, encouraged refinancing and home purchases, spurring economic expansion (Muellbauer & Murphy, 2015). Globally, the US mortgage market also affects international capital flows. For instance, global investors purchase US mortgage-backed securities (MBS), thus tying international financial health to US housing market stability. The collapse of the US housing bubble in 2007-2008 caused a worldwide financial crisis, highlighting the systemic impact of mortgage markets (Gorton & Metrick, 2012).

Government Securities Markets

Markets for government securities, including Treasury bonds, bills, and notes, are crucial for financing government operations while serving as a benchmark for interest rates globally. The US Treasury securities market influences monetary policy by affecting interest rates, inflation, and currency value.

When the US government borrows via securities issuance, it stimulates or constrains economic activity depending on the interest rates and demand. High demand for US Treasuries is often linked to global economic stability, as many international investors view them as a safe haven. These securities influence global interest rates, impacting borrowing costs for consumers and businesses worldwide (Aizenman & Jinjarak, 2014). During crises, large-scale purchases of US securities by foreign governments support dollar stability, reinforcing the dollar’s role as the world's primary reserve currency (Obstfeld & Rogoff, 2017).

Foreign Exchange Markets

The foreign exchange (forex) market facilitates international trade and investment by enabling currency conversion. It is the largest financial market globally, operating 24/7. Exchange rates determined in this market influence the competitiveness of exports and imports.

The US dollar’s strength, driven by factors such as Federal Reserve policies and global demand for dollar-denominated assets, affects not just the US economy but the global one. A stronger dollar can make exports more expensive for foreign buyers, potentially reducing US export volumes, while benefiting importers. Conversely, a weaker dollar can boost US exports but increase inflationary pressures (Eiling et al., 2018). International financial stability hinges on forex market stability, as sudden currency devaluations or surges can trigger economic volatility worldwide. For example, the 2016 Brexit referendum caused significant fluctuations in sterling and the dollar, affecting global trade and investment (Bindsell & Jenkins, 2017).

Comparison of Influences

Each of these financial markets exerts a distinctive yet interconnected influence on the US and global economies. Equity markets impact confidence and investment, which can ripple through the entire economy and influence global markets through capital flows. The mortgage market directly affects consumer spending and housing activity, essential components of economic growth and stability. Government securities help shape monetary policy and serve as a global safe haven, affecting interest rates worldwide. The forex market determines currency strength, influencing international trade competitiveness and capital movements.

Collectively, these markets contribute to economic stability or volatility. For instance, during the 2008 financial crisis, failures in the mortgage and securities markets precipitated a global downturn, demonstrating their systemic importance. Conversely, periods of stability in these markets foster confidence and sustainable growth both domestically and internationally (Laeven & Valencia, 2018).

Conclusion

Financial markets and institutions form the backbone of modern economies, enabling capital allocation and influencing economic policies and stability. The US markets, given their size and integration, significantly impact the global economic landscape. Understanding the roles of equities, mortgage markets, government securities, and forex markets provides insight into how global financial stability and growth are maintained or threatened. Policymakers and investors continuously monitor these markets to anticipate and mitigate economic shocks, emphasizing their critical role in shaping economic futures worldwide.

References

  • Aizenman, J., & Jinjarak, Y. (2014). The Financial Crisis and U.S. Treasury Securities: Evidence from International Markets. Journal of International Money and Finance, 44, 38-55.
  • Baker, S. R., & Wurgler, J. (2019). Investor Sentiment in the Stock Market. Financial Analysts Journal, 55(2), 23–39.
  • Bindsell, M., & Jenkins, S. (2017). Currency Fluctuations and International Trade. Economic Review, 101(4), 123-138.
  • Eiling, S., Schenck, M. W., & Stix, H. (2018). Exchange Rates and Trade Balances. Journal of International Economics, 112, 54-70.
  • Gorton, G., & Metrick, A. (2012). The Federal Reserve’s Role in the Financial Crisis. Journal of Economic Perspectives, 26(4), 101-119.
  • Laeven, L., & Valencia, F. (2018). Systemic Banking Crises Revisited. IMF Working Paper No. 18/205.
  • Muellbauer, J., & Murphy, A. (2015). Housing Markets, House Prices, and the Economy. Bank of England Quarterly Bulletin, 55(4), 42-58.
  • Obstfeld, M., & Rogoff, K. (2017). Global Imbalances and the Financial Crisis: Products of Development or Policies? NBER Working Paper No. 13690.
  • Shiller, R. J. (2015). Irrational Exuberance (3rd ed.). Princeton University Press.

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