Your Niece Just Started Her College Career With A Major In E

Your Niece Just Started Her College Career With A Major In Economics

Your niece just started her college career with a major in economics. She is curious as to the interrelationship between the success of an economy and the financial markets, concepts, and financial institutions. Accordingly, she has developed a list of questions addressing these issues and has asked that you explain the ideas. What are the financial markets and what purposes do they serve? What are financial intermediaries? How do these intermediaries function in the economy? What is a federal government budget deficit? What is the national debt? How does a budget deficit affect the economy? She is also curious about the time value of money concepts. Specifically, she has the following questions about these concepts: Why are consumers considered to be risk averse? What methods could used to deal with risk? It has been said that a dollar received today is worth more than a dollar received tomorrow. What does this mean and what is the significance to the economy? What is the difference between the present value of a future sum of money and the future value of a present sum of money? What is the significance of these concepts to economics? If you deposited $1,000 in an account paying 6% interest compounded annually, how long would it take to double? Deliverables: Submit an 3-6 page paper in Microsoft Word format, to the W3: Assignment 1 Dropbox by Saturday, June 6, 2015, addressing the above-noted items. Create a Microsoft PowerPoint presentation of 5-10 slides that summarizes your findings in your report. Post your presentation in the Assignment 1 Discussion Area by Saturday, June 6, 2015.

Paper For Above instruction

The intricate relationship between a nation's economic success and its financial markets, institutions, and fiscal policies forms the cornerstone of macroeconomic health. Understanding these elements is vital for comprehending how economies grow, stabilize, and respond to both internal and external shocks. This paper elucidates key concepts such as financial markets, intermediaries, government fiscal policies, and the time value of money, providing a comprehensive foundation for an aspiring economist.

Financial Markets and Their Purposes

Financial markets are platforms or systems where buyers and sellers trade financial assets, including stocks, bonds, currencies, and derivatives. They facilitate the flow of funds from savers to borrowers, thus enabling investments that fuel economic growth. By providing liquidity, price discovery, and risk transfer mechanisms, financial markets support economic efficiency and stability. For example, stock exchanges like the NYSE and NASDAQ allow companies to raise capital by issuing shares, which investors purchase, fostering business expansion multiple sectors.

Financial Intermediaries and Their Functions

Financial intermediaries, such as banks, credit unions, and mutual funds, act as middlemen between savers and borrowers. They collect funds from depositors or investors and allocate these resources to entities in need of capital, such as businesses or governments. These institutions perform essential functions including assessing credit risk, reducing transaction costs, providing liquidity, and diversifying risk. For instance, commercial banks offer loans to consumers and businesses, promoting consumption and investment. This intermediary role enhances overall economic productivity and stability.

Government Fiscal Policies: Budget Deficit and National Debt

A federal government budget deficit occurs when government expenditures exceed revenues within a fiscal year. The accumulated deficits contribute to the national debt—the total amount owed by the government over time. Persistent budget deficits can lead to increased borrowing, higher interest costs, and potential crowding out of private investment. Such fiscal imbalances may influence interest rates, inflation, and economic growth by impacting government spending, taxation, and the availability of funds in financial markets.

Economic Impacts of Budget Deficits

Budget deficits can stimulate economic growth during downturns by funding public projects and social programs, thus boosting demand. Conversely, sustained deficits may undermine investor confidence, lead to higher interest rates, and increase the burden of debt servicing. The debate among economists often centers around whether deficits are beneficial or detrimental, emphasizing the importance of sustainable fiscal policies that balance growth and fiscal responsibility.

Time Value of Money Concepts

The time value of money (TVM) illustrates the principle that money available now is worth more than the same amount in the future, primarily due to interest earning potential and inflation. Consumers are considered risk averse because they prefer certainty; thus, they require compensation (interest) for deferring consumption or undertaking risk. Methods such as diversification, insurance, and hedging are used to mitigate risk.

Understanding TVM involves concepts like present value (PV) and future value (FV). PV discounts future cash flows to their current worth, incorporating interest rates and time periods, while FV projects the value of an investment at a future date based on current principal and interest accumulation. These concepts are fundamental in economic decision-making, investment analysis, and fiscal policy.

Applying these principles, if $1,000 is deposited at a 6% annual compounded interest rate, the compound interest formula can determine the doubling time. Using the rule of 72, dividing 72 by the interest rate gives an approximate doubling period, which in this case is 12 years.

In summary, grasping these fundamental economic and financial concepts enables a deeper understanding of how markets operate and how policies influence economic stability and growth. As a student majoring in economics, developing a solid understanding of these interconnected ideas is vital for analyzing real-world economic phenomena and making informed decisions.

References

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  • Mankiw, N. G. (2020). Principles of Economics. Cengage Learning.
  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
  • Investopedia. (2023). Financial Markets Explained. Retrieved from https://www.investopedia.com
  • U.S. Department of the Treasury. (2023). The Budget and Economic Data. Retrieved from https://home.treasury.gov
  • Friedman, M. (1956). The Quantity Theory of Money. In Studies in the Quantity Theory of Money.
  • Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77-91.
  • Sargent, T. J., & Wallace, N. (1981). Some Unpleasant Monetarist Arithmetic. Federal Reserve Bank of Minneapolis.
  • Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money. Harcourt Brace.
  • Bernanke, B. S. (2007). Financial Stability and Monetary Policy. Speech at the Federal Reserve Bank of Kansas City.

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