Contemporary Issues in Financial Services Essay - 2

Contemporary Issues in Financial Services - Essay Example This paper will, therefore, identify and discuss some of the key and contemporary issues that have emerged in the financial services sector. The main aim will be to bring into focus some of the key issues in the nature and functionality of financial systems that continue to influence the economy and other financial service operations. To begin, it has been noted that the financial systems in the contemporary society have increasingly been associated with a linkage to overall economic conditions of nations. This will be discussed in the section that follows. Links between the Financial System and the Real Economy The relationship between a financial system and the real economy can be clearly understood in three components. They include the composition of aggregate demand, level of aggregate demand and allocation of resources. Composition of Aggregate Demand The financial system plays an important role in the economy in various ways. At the beginning, one should mention aggregate deman ds in relation to the total expenditure of goods and services of an economy for a specified period for a specified price (McEachern, 2011). The financial system of an economy has a bearing on the way its aggregate demand is constituted. One of the ways it influences economic dynamism is in the way it acts as a facilitator of lending on the one hand and borrowing on the other. Since scarcity is one of the great hindrances to economic growth, by providing a means of obtaining extra resources to offset deficits, the financial sector is therefore a good linkage to economic growth (Burton and Brown, 2009). In effect, the financial sector plays a direct role in the effective planning of expenditure independent of an individual or organization’s present income. A good example is the way creditors or lending institutions are able to store wealth for future consumption through giving out at certain levels of interest whereas borrowers are able to acquire finances to make purchases in advance of income. The result of positive influence of a well regulated and efficient financial system will lead to a relatively higher investment rate than that of consumption in the given economy. Since economic growth relies on investment levels, a financial system is, therefore, a necessary component of the economy. Level of Aggregate Demand Financial development levels may also have an influence on the level of aggregate demand. The level of agreement is subject to the rate of flow of the finances or money in the financial system. A high flow, or otherwise referred to as velocity, is a great determinant of the level of aggregate demand. In a financial system, individuals or lending institutions may decide to retain the cash they have at their disposal as a result of taking precautions for speculative purposes or by having them in solid assets. As a result, the flow or velocity of finances may be lowered as a consequence of decreased liquidity. On the other hand, a well function ing financial system that is able to effectively produce a range of assets that are liquid in nature may help reduce the amounts held by the said parties in the financial markets. The resultant effect will be that of increased velocity of money in the economy which is healthy for economic growth enhancement. The level of aggreg