Discuss the role of Financial Markets in our economy.

According to Arellano, C., Bai, Y., & Kehoe, P. (2010), financial markets assists in efficiently directing the flow of savings and investment in the economy in techniques that support in facilitating the accumulation of capital and the creation of goods and services. Financial market’s goal is to create wealth and liquidity derived from its activities which do not only encourage savings but also the proliferation of commercial sources in the marketing environment and for the investments needed to boost innovativeness and enterprise. Financial markets are significant in the reemergence of other strong economic sectors within a country which will, in turn, attract substantial foreign investments and local participation.

Also, the financial market is helpful in the growth of capital and the creation of goods and services. The cost of credit and returns on investment are an indication to the producers and consumers who are regarded to be financial market participants. The signals are significant in directing funds to the customers, enterprises, governments, and investors who like to get loans through connecting the people who value the monies to the willing lenders. Similarly, the existence of a steady financial market and organizations also encourage the stable international flow of funds between various countries.

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Additionally, stable financial markets and organizations tend to bring down the search and the cost of the transaction in the economy. Through providing an array of commercial products, with different risks and pricing strategies as well as maturity, a well-structured financial system creates goods and services to participants that engage borrowers and lenders with a close match of their wants (Madura, 2014). Therefore, institutions, governments, and businesses who are in need of funds will be able to find out which financial bodies or which financial markets can provide funding and the cost of borrowing. The process will enable the investors to compare the cost of borrowing to their return expectations; hence, making the best investment choice that suits their wants.



Arellano, C., Bai, Y., & Kehoe, P. (2010). Financial markets and fluctuations in uncertainty. Federal Reserve Bank of Minneapolis Working Paper.

Madura, J. (2014). Financial markets and institutions. Nelson Education.


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