Macroeconomic Impact on Business Operations
Monetary policy is a strategy that is used by the federal government to influence the economy.
Having monetary authority allows the government to control the supply and availability of money (Federal Reserve, 2009). Along with the monetary policy, political objectives have a strong influence on the economy and its growth. The main goal of our government is to implement “macroeconomic stability”, which includes low unemployment, low inflation, and steady economic growth (The Financial Pipeline, 2009). This paper will discuss how money is created, and how factors such as GDP, economic growth, inflation, and unemployment are affect by the monetary policy.
Money creation is a tool that is used to produce or issue money. The process of money creation takes place in three ways. The first step is by manufacturing and distributing paper currency or metal coins. Second, money is distributed through debt, lending, and government policies. The regulation, production, and the redemption of money are regulated through the Federal Reserve (Federal Reserve, 2009). The Federal Reserve determines the operation of financial markets and the purchasing power of money throughout the U.S. economy. Within the Federal Reserve is the regional bank, which in turn measures the money supply. These regional banks within the Federal Reserve are private banks that control the issuance of “debt-backed” money to the government (The Financial Pipeline, 2009).
The Federal Reserve is responsible for implementing monetary policies that help regulate the economy. The Federal Reserve conduct’s the nation’s policy by influencing monetary and credit policies. They also supervise and regulate the banks in order to ensure the consistency and
safety of the nation’s financial system. Lastly, the Federal Reserve provides financial services to depository institutions, and foreign official institutions. It also plays a major role in the operation of the U.S. payment system (Federal Reserve, 2009).
In order to stimulate the economy, the Federal Reserve implements the federal funds, which are the reserve balances that private banks keep at their local Federal Reserve Bank. The reason for keeping money at the Federal Reserve Bank is to maintain a strategy that allows for private banks to loan money to one another. This financial market system plays a vital role within the Federal Reserve because it influences the use of monetary policy. This action in turn influences the use of monetary policy and it determines the amount of money that the private banks charge each other for the lending of those federal funds (Federal Reserve, 2009).
The Federal Reserve consists of 12 Federal Reserve Banks. These 12 banks distribute banking services to depository institutions and also to the Federal government. These banks are also responsible for maintaining accounts, providing various payment services that include collecting checks, electronically transferring money, and lastly distributing and receiving currency and coin (Federal Reserve, 2009). When it comes to retail, the Federal Reserve provides a series of financial services that deal with wholesale payments. According to Ghatak & Sanjers (2007), retail payments are small dollar amounts that include a depository institution’s retail clients, which consist of small and large businesses. Wholesale payments are reserved for large dollar amounts, these depository institutions are typically for large corporations.
Monetary policy has a strong influence on the economy when it comes to inflation. In our economy there are two types of inflation, which are monetary inflation and price inflation.
Monetary inflation deals with an increase in the money supply. Price inflation deals with the steady increases of the level prices, which in turn determines the value and purchasing power of money (Steele, 2008). If there is a fast increase in money and credit over a certain period of months, it will usually result in price inflation. According to Ghatak & Sanjers (2007), when it comes to price inflation a dollar buys less and less over time. Monetary and price inflation can have a negative impact on the economy. Lenders lose money because the value of a dollar isn’t worth as much, businesses struggle with projecting future plans and, in turn lead to decrease in projects. Mortgage companies really suffer from inflation, because monetary inflation increases long-term interest rates (The Financial Pipeline, 2009). Those long-term interest rates typically leads to a decrease in consumer spending because people are less likely to make major purchases such as homes and cars, because of high interest rates.
The overall goal of implementing monetary policy within the U.S. economy is raising or lowering interest rates based on the demand for goods and services (Steele, 2008). Changes with interest rates affect the demand for goods and services by determining borrowing costs, the availability of loans, the income of households, and foreign exchange rates. Long term interest rates are a reflection of the financial markets expectations of what the federal government will do in the future (The Financial Pipeline, 2009). When it comes to the concern of inflation the financial markets add a risk premium to long-term rates, which in turn will make interest rates higher. If there is a decrease in interest rates, the cost of borrowing is lower, which is good for business growth. It is also good for economic growth, because it leads to an increase of supply and demand. Another result of lower rates is valuable bonds and higher stock prices. Individuals, who have stock that is valued high, are more likely to spend more, and businesses are more willing to invest. Monetary policy affects inflation by the demand to enforce labor and capital markets beyond their abilities (Federal Reserve, 2009). If the monetary policy is persistent with maintaining low short-term rates there will be an increase in interest rates, which in turn could deter spending. So in order to deal with inflation, the goal is to decrease the money supply in the economy. Reduction of excess money would lead to a decrease in aggregate demand, and would help reduce the level of price inflation (Ghatak & Sanjers, 2009).
Monetary policy also plays a critical role on employment and the labor market. The federal government structures the labor market through paying unemployment insurance benefits, determining the minimum wage, raising or lowering income taxes, and lastly setting the rules and guidelines for labor unions to operate. Also employment, is influenced by government investment and the infrastructure, this includes schools, roads, and parks. These places have an effect on the amount of money paid to the labor force. The government’s monetary policy has an effect on the cost and availability of money and credit through the demand for labor. When there are high levels of unemployment, the Federal government must be consistent in order to ensure the demand for money is growing fast enough (Ghatak & Sanjers, 2009). One strategy for the government is to try to lower the unemployment rate by stimulating the growth of the money supply. An outcome of this strategy could possibly be a boost in economic activity, but it doesn’t stabilize the rate for high unemployment. Even though bringing more money into the economy sounds like a legitimate reason to help a weakening economy, though it doesn’t mean it is a reasonable cure. Higher wages and prices could mean an unreasonable change in economic growth, which in turn can lead to inflation and businesses could stop hiring (Steele, 2008).
By the federal government establishing the monetary policy, they are constantly looking for ways to keep the unemployment and inflation levels low. When there is a steady economy, reducing doubt in the marketplace is crucial for companies and its workers. This way more businesses and investment decisions can be made, which can lead to the hiring of more employees. Having stability allows the economy to grow and produce at high levels.
Currently, the nation’s unemployment rate is at 9.8 percent. According to The Financial Pipeline (2009), many Americans have become frustrated when it comes to looking for work. In the U.S. employers cut 263,000 jobs last month and there were more than 200,000 layoffs for the month of August. Since the recession began there has been a loss of more than 7.2 million jobs. Those numbers are terribly high, and could possibly get worse. The high loss of jobs will affect consumer spending negatively. In order for the unemployment rate to improve, the industries of renewable energy, healthcare, and construction will have to experience a steady rate of growth (Ghatak & Sanjers, 2009). Overall, in order to have a balance of a healthy economy and steady employment there has to be a steady pace of revenue, strong interest rates, and economic growth. The monetary policy is a reflection of the government’s ideal of regulation and trade within the economy.
Federal Reserve. (2009). Federal Reserve Bank of San Francisco. Retrieved from www.frbsf.org
Ghatak, S., & Sanjers, W. (2007). Monetary policy rules in transition economies: the
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Steele, D. (2008). The alliance takes on the reserve bank and its effect on jobs. Monetary
Policy and Employment. Retrieved from www.jobsletter.org.nz/jbl08410.htm
The Financial Pipeline. (2009). Monetary Policy. Retrieved from www.finpipe.com