Macroeconomic Impact On Business Operations

Macroeconomic Impact on Business Operations

Macroeconomic Impact on Business Operations

The study of macroeconomics focuses on understanding the different factors that affect and create an economy. As stated, "...study of national or regional economies in terms of the total amount of goods and services produced, the total income earned the level of employment of productive resources, and the general behavior of prices." (Britannica, 2007). These factors can be affected by a government's monetary policies during times of economic uncertainty. Government monetary policies strive to encourage economic growth by using different methods or "tools" to affect outcomes. Understanding how each factor affects the other, will allow entities to make choices that may promote economic growth. The following paper will discuss methods used in the Federal Reserve simulation to influence the nation's money supply which in turn will affect macroeconomic factors.

Monetary Policies and Macroeconomic Factors

To have an economy that is recognized as "growing", one of two events must occur. "1) an increase in the real GDP must occur over a some time period 2) an increase in real GDP per capita occurring over some time period" (Brue & Campbell, 2004, Chap.7). Macroeconomic factors that can affect economic growth are unemployment rates, inflation, interest rates, and the Gross Domestic Product (GDP).

Economists categorize unemployment as an individual actively looking for a job, but cannot find one. This does exclude full-time students, retired individuals, children, and people not looking for a job (Brue & McConnell, 2004, Chap.8). Inflation is recognized as the increase of the majority of prices for goods and services. As stated, "Inflation is a rise in the general level of price."(Brue & McConnell, 2004, Chap.8). Interest rates is defined as follows, "The interest rate is the yearly price charged by the lender to a borrower in order for the borrower to obtain a loan. This is usually expressed as a percentage of the total amount loaned" (Moffat, 2007) Gross Domestic Product is the final value of all products and services produced in a given year (Brue & McConnell, 2004, Chap.8.). How the aforementioned factors are changed or are affected, may have a direct correlation on an economies growth pattern.

One such method to affect changes to macroeconomic factors is through monetary policies. Monetary policies can be developed by the government, banks, or other financial entities. Monetary policies are designed to stimulate economic growth, decrease unemployment, and create price stability (Brue & McConnell, 2004, Chap.15). Monetary policies can either be expansionary (increase total supply of money into the economy) or contractionary (decreases total supply of money into the economy).

Monetary policies have been met with opposing views due to variables that accompany them. One variable is the lag times that can occur when recognizing economic changes and delays with the monetary policy after it has been implemented. As stated, "While the financial markets react quickly to changes in monetary policy, it generally takes months or even years for such policy to affect employment and growth, and thus to reach the Fed's long-term goals. (Answers.com, 2007). Another issue is that monetary policies are not as effective with severe recessions, which is called cyclical asymmetry. Finally, changes in the velocity of existing money in the economy can offset monetary policies, which may vary the amount of money being inputted into the system. (Brue & McConnell, 2004, Chap.15).

Creation of Money

Economists view money as being created by commercial banks that make loans from their excess reserves to create checkable money. As stated, "Much of the money we use in our economy is created through the extension of credit by commercial banks. (Brue & McConnell, 2004, Chap.14). Loans are given to individuals and companies based on the promise that the loan will be paid back over a period of time. By extending credit on the basis of a promissory note, the bank has created cash or checkable money though a loan transaction that can be inputted back into the economy for other goods and services. "Checkable deposits are bank debts in the sense that they are claims that banks and thrifts promise to pay "on demand."" (Brue & McConnell, 2004, Chap.14).

Another method in which banks create money is with buying government bonds from the public. As stated, "The bank accepts government bonds (which are not money) and gives the securities dealer an increase in its checkable deposits (which are money). (Brue & McConnell, 2004, Chap.14). Again, the bank is giving money to a seller for a potential revenue source, but is not receiving any money from the transaction.

Money can be recognized as "destroyed" when a loan is paid back. This is because when the loan has been paid in full, the payment is for the return of the promissory note, not an exchange for goods and service. With a bank loan paid in full, there is no longer checkable money being used that was the result of the loan transaction, and the bank is now holding money that is not being reintroduced into the economy. "...that amount of checkable deposits