Every country is built on a certain economy; controlling, managing, sustaining is the main major role of an economy; Economy means the largest set of inter-related economic production and consumption activities which aid in determining how scarce resources are allocated.
Each economy must encompass every single detail that is related to the production and consumption of goods and services in a certain allocated area, trying to sustain it in a way that might help to prosper and develop certain sectors.
In each economy there are two different types of policies; fiscal and monetary policy:
The fiscal policy: is a policy stimulated by the policy makers, it is divided into taxation law and government spending; the government can adjust these laws in order to modify the amount of non-refundable income available to its tax payers, for example a government could ask more taxes from individual which makes them have less amount of money used in spending on goods and services, then the government could use those money to inject it back again into certain companies and markets by something called Government Spending. The higher the government spending means that they are going to demand more taxes from individuals in the economy; but the major disadvantage of this policy is that it might take time in order to achieve all that.
The Monetary Policy:is the second type of polices used in managing a certain economy, this type of policy is mainly controlled by central banks, meaning that they control the supply of money into the economy, by putting cost on the borrowing of these money with something called Interest Rates. Interest rates are defined as the percentage amount of money charged on borrowed or lent money, as it could be variable or fixed.
Another classification to an economy is, open and closed economy; an open economy means that it has bilateral trade with other economies all around the world for example the United States. A closed economy has a limited regulated trade with other world economies like china.
Inside each economy there is a Financial System; Financial System is “found to organize the settlement of payments, to raise and allocate finance and to manage the risks associated with financing and exchange; developed to secure efficient payment system, security markets and financial intermediaries that arrange financing and derivative markets and financial institutions that provide access to risk management instruments”.
There are two major roles of a financial system; the first one is to organize surplus funds from people and organizations, and to reallocate them into deficit facing organizations or people; as those mobilized funds are used to generate returns for the surplus entities, by enabling deficit entities to augment their productive and purchasing capacities.
A financial system contains something called financial markets; a financial market is a mechanism that allows people to easily buy and sell financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect efficient market hypothesis.
Securities:“essentially a contract that can be assigned a value and traded”.
Commodities:“a tangible good or product that are subject of sale or barter, such as grains, metals, and foods traded on commodities exchange or on spot market”.
“it is a specified type of commodities; it is defined with a certain type of good that must be given without any changes in the contract”.
Transaction cost: “cost incurred when buying or selling securities, which includes commission and spreads (the difference between the prices the dealer paid for a security and the prices at which it can be sold)”.
Efficient Market hypothesis: “means that each share price in a market must reflect all relevant information”.