Macroeconomic Impact on Business Operations

Topics: Monetary policy, Inflation, Central bank Pages: 6 (1819 words) Published: September 17, 2010
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Macroeconomic Impact on Business Operations

University of Phoenix�

This paper will address the how the monetary policy has an impact on the factors of macroeconomics, such as gross domestic product (GDP), interest rates, inflation, and unemployment. According to the Federal Reserve, the Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. The Federal Reserve uses two means to drive macroeconomics, fiscal and monetary policy. This paper's focus will be on the concept of monetary policy and how business and society is affected as a whole due to these macroeconomic factors. This paper will address the tools used by the Federal Reserve Board of Governors to control the money supply, the control of bank reserves, and interest rates and how these tools are used to influence the money supply and the macroeconomic factors. Also discussed in this paper are the effects of monetary policy on the economy and explaining how money is created. Finally, a recommendation of a monetary policy, discussing which combinations of monetary policy will help to best achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment.

Macroeconomic Impact on Business Operations

_Tools used to Control Money Supply_

The responsibility of the Federal Reserve was to fix the monetary policy by a central bank, in order to influence the cost of money and its availability. The Federal Reserve (Fed) uses three tools to regulate the monetary policy; Open Market Operations, Discount Rate, and Required Reserves. The Federal Committee of the Open Market is responsible for operations of open market. Open Market Operations comprise of T-bills, bonds and other Federal instruments that are bought and sold through auctions to investors. When investors sale these instruments it drains money out of the system and when these instruments are bought, it releases money back into the system. The Superior Advice of the Federal Reserve is responsible for the type of discount and the requirements of reserve. If the Federal Funds Rate charged by other banks is higher than the Discount Rate charged by the Fed than the banks are required to borrow from the Fed. The spread between Discount Rate and Federal Funds Rate increases as Discount Rate is decreased, forces the banks to borrow from the Fed rather than other banks, causing money in the system to be increased. There is no effect on the money supply when there is a positive spread. This condition exists when the Federal Funds Rate is lower than the Discount Rate causing the banks to borrow from each other. The percentage of the deposits that any bank holds as reserves is known as the Required Reserve Ratio. This ratio is mandated by the Fed, if it is decreased, the banks will be required to have smaller amount of money as reserves. This allows the banks to have more money available to lend to customers in the proportional amount that was decreased, increasing the money supply in the economy. The opposite is also true, the money supply in the system will be decreased if the Required Reserve Ratio is increased. (Online Simulation)

Using the these tools, the Federal Reserve influences the demand and the source of the balance that the institutions must maintain in the banks of the Federal Reserve, altering the ratio of federal funds.

_Influences on the Money Supply_

Releasing money into the system results in higher real GDP and lower unemployment and raises inflation. Inflation and real GDP work at cross-purposes. Striking the right balance between the two is very critical....
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