Macroeconomic Impact on Business Operations

Authors Avatar
Macroeconomic Impact on Business Operations


Macroeconomics is the study of the economy as a whole. A thriving economy will create money and produce goods and services for consumption. Economic systems are influenced by macroeconomic factors. A country will strive for sustainable economic growth to improve the standard of living for its citizens. Fiscal and monetary policy is used to influence the economy. A well-defined monetary policy has the ability to control an economy and produce sustainable growth.

Money Creation

Money can be created by a government printing more money or through the banking system. When a government prints more money and spends this in the economy, the actual value of each unit of money already in the economy falls. This reduction of value for each unit of money is known as inflation. When a government prints money to finance a war or other purpose, hyper-inflation usually occurs. One unit of money in the current period is worth substantially less in a near future period. Creating money in this manner is not good for an economy.

A better way to create money is to use the banking system. In the United States, the banking system must keep reserves (amounts of money based on deposit levels at the Federal Reserve Bank in non-interest bearing accounts that can not be used for any other purpose) When a bank makes a loan to an individual or business, money is created. The money is created because the bank puts the proceeds of the loan into a checkable account for the borrower. This increases both sides of a banks balance sheet and "increases" the money supply. Since the lending bank must keep a required reserve, the full amount of the loan does not enter the money supply. The increase in the money supply is not limited to the lending bank. The reserve amount stays out. This ratio is controlled by the Federal Reserve System. The money that the borrower spends increases the checkable accounts of the sellers of goods that the borrower purchased with the loan proceeds. This process compounds the effect of the original banks loan. The actual amount of created money is reciprocal to the required reserve rate (M=1/r, where r = the reserve rate). Banks are able to continue to create money as long as they meet their reserve requirements.

Banks can create money by purchasing bonds from the public or government. Purchasing bonds adds checkable deposits to the sellers that can be used to purchase goods and/or services. The total effect on the money supply is comparable to the loan example above.
Join now!

Monetary Policy

An economy can be affected by fiscal or monetary policy. Fiscal policy is enacted by the government through legislation and monetary policy is determined by economic policies enacted by the Federal Reserve System. Direct legislation by the government can be affected by political agendas and may not be implemented in an unbiased way that best benefits an economy. "Because monetary policy works more subtly, it is more politically palatable (McConnell, 2005, pg 305).

Monetary policy has two advantages over fiscal policy: 1) speed and flexibility and 2) isolation from political pressure. Monetary policy ...

This is a preview of the whole essay