The Role of Finance in Economics

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The Role of Finance in Economics No Works Cited Finance is a branch of economics concerned with providing funds to individuals, businesses, and governments. Finance allows these entities to use credit instead of cash to purchase goods and invest in projects. For example, an individual can borrow money from a bank to buy a home or an industrial firm can raise money through investors to build a new factory. Governments can issue bonds to raise money for projects. Finance plays an important role in the economy. As banks, credit unions, and other financial institutions provide credit, they help expand the economy by directing funds from savers to borrowers. For example, a bank acquires large amounts of money from the deposits of individual savers. The bank does not let this money sit idle but instead provides loans to borrowers who might then build a house or expand a business. The savings of millions of people percolate through many financial institutions, spurring economic growth. A wide variety of financial institutions have different roles in finance and the economy. Some institutions, such as banks, link lenders and borrowers. These institutions act as an intermediary among consumers, businesses, and governments by lending out deposits. Other institutions, such as stock exchanges, provide a market for existing securities, which include stocks and bonds. Stock exchanges encourage investment because they enable investors to sell their securities when the need arises. Many aspects of finance are studied individually. Corporate finance centers on how businesses can best raise and spend their funds. Public finance, which I will key in on, focuses on the financial role of federal, state, and local governments. Public financ... ... middle of paper ... ... people are concerned about the size of the U.S. national debt. They fear that a large amount of debt harms the economy and feel that the money used to pay interest on the debt could be better spent on other uses. Some people are also concerned about the ability of future generations to pay back the debt. However, many economists argue that the size of the debt is misleading. They point out that an important measure of the severity of a nation's debt is its size as a percentage of the nation's gross domestic product. Based on this measurement, the national debt of the United States during the mid-1990s was about half the size of the U.S. debt at the end of World War II in 1945. Other economists contend that when the balance of the debt is compared between years it does not account for the effects of inflation, which makes balances from later years appear larger.

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