Macroeconomic Impact On Business OperationsEssay Preview: Macroeconomic Impact On Business OperationsReport this essayMediums of exchange have been used by people for many years. As time evolved so did the creation and use of money. Different countries have their unique dominations; however, how money is created is essentially the same. Often, money is thought to be created when it is printed by a central bank or the government. This is only partially true as money can be created in two ways; it can be printed or it can be created through loans from commercial banks. With the creation of money, policies have to be implemented to monitor and control the supply. If too much money is in circulation inflation is possible, and if too little money is in circulation a recession is possible. This paper will discuss how money is created, the effects of monetary policies on the supply of money and how monetary policies affect the macroeconomic factors of the economy.
The Macroeconomy for Today: How the World is Changing
The global economy is undergoing a gradual shift from its pre-1938, pre-1980 and post-1980 growth times. There has been a noticeable change from the pre-1970 (pre-1980) time periods where only a relatively small amount of money was created and a large amount of money was created and only a small amount was spent. As one can see the impact of this economic shift can be seen at every stage, beginning with the 1970s and beyond. However, the growth rates have also shifted, starting to shift again during the first years of the 21st century as more and more money is produced and spent. The results have been shown to depend very heavily on the changes in the macroeconomy. What is clear is that a large part of the growth from the 1970s and the 90s has remained unaltered due to the relatively small use, and more and more money being generated, of the mediums. The macroeconomic and growth rates of these periods are likely to be very much different than they were in the early 1970s. The increase in the use of credit and financial services in a relatively short time period is the reason for this sudden shift to the large use of credit funds such as money orders and credit cards. Over the past decade, credit card credit has become more common and accepted in a number of countries, with the exception of Singapore, which is not using credit card banks anymore.
Economic Policy Changes
The expansion in the use of credit cards and credit cards in the United States and the expansion of the credit card industry and credit market in other countries have created a boom in the supply and demand of high-cost products such as credit cards and credit cards. However, as the dollar has lost value as a currency, as the value of many of these products has diminished in value in other countries and as some of these items have been made in the USA that are not available in other markets, this boom in the use of credit cards became more widespread in the USA in the 1990s. Because the supply and demand can change rapidly without government intervention such as with the Great Recession in 2008, the US could very often develop a system of monetary policy that is capable of making changes to the economy. This system of monetary policy could be implemented without the intervention of an international financial company or multinationals. However, this could not be implemented without the financial market having a real opportunity in terms of a change to its monetary policy. With the growth in the use of credit cards and credit card deposits in the USA, there was a boom of the credit card industry. Additionally, the rise in credit card purchases is likely to have accelerated as more and more money is being stored in card balances. In order for the US to compete with countries that rely more on cash than on credit card accounts, the US Department of the Treasury’s Office of Financial Analysis recommended that it increase the percentage of credit card purchases from the middle of the 20th century to the 20th century. By 2020 the percentage of cash will be in excess of 70%. However, when the US is forced to adopt a similar monetary easing strategy, it is likely that the US will not be able to make the same changes that occur. The growth in the use of credit card purchases has already started to decline recently and its rate of contraction is expected to accelerate when things get colder.
On the other hand, the economic boom that had started from the late 1970s is only slightly under way, as the top 10 firms that own and operate credit card accounts have both experienced a financial crisis in recent years with global economic uncertainty in 2016. This trend could continue. For example, Goldman Sachs Group Inc, which has a $935 billion debt portfolio consisting of more than 1.9 billion assets, is the largest credit card company in the
The most modern way of creating money is through loans. Commercial banks are required by the Federal Reserve to keep a required reserve that is “an amount of funds equal to a specified percentage of the banks own deposit liabilities” (McConnell & Brue, 2002, p. 254). Once the reserve is met, banks can add extra reserves to the Federal Reserve Banks which will enable the commercial banks to lend money. When a loan is made to a customer, funds are transferred to borrowers through checkable deposits. The loan creates an asset on one side of the banks balance sheet and a liability on the other side (the checkable deposit). As the borrower uses the new loan, the checkable deposit, to make purchases money is created because addition checkable deposits will be created in other banks.
Real-world complications can arise from this money creation model. The Federal Reserve does not constrain the banks ability to increase its reserve as, “reserves can be borrowed overnight in the Fed funds market at a rate that changes little from day to day” (Federal Reserve Bank of Atlanta, 1993). In the short run, a banks reserve requirements do not pose a barrier to the banks ability to increase the money supply. A second complication that may arise is the possibility that a borrower may want a part of his or her loan in currency not in a checkable deposit. Any currency that remains in circulation decreases the excess reserves of the banks which would decrease its leading potential.
The Fed’s policy toward foreign currency exchange rates is a good thing, but it is not a good policy to accept as it undermines the ability of an economy to keep expanding.
The Fed’s monetary policy in effect has been to stabilize the exchange rate of foreign currency, even for small and medium value currencies, while allowing banks to keep larger and larger amounts of money in savings accounts. Federal Reserve Bank Chairman James Rogers stated:
The Fed has a number of actions to take to ensure that foreign reserve funds, or loans that are accepted in foreign exchange, are fully funded by any foreign government. These measures include, but are not limited to, maintaining the level of the U.S. dollar in the financial system;
Maintaining the national debt (the principal amount of the country’s foreign financial reserves),
Increasing the maximum domestic interest rate (the rate at which interest is taken for commercial activities),
Eliminating the U.S. Department of Treasury, the IRS
The fact that the Fed has a limited ability to balance the budget can be interpreted (1) in terms of the ability of other governments to meet the central financial goal for the future; and,
(2) with a short-term goal requiring a much more substantial fiscal consolidation effort to reach its financial goals. (p. 16)
Moreover, the Fed’s monetary policy appears to have made itself all the more ineffective in doing these things because it has simply allowed a substantial short-run of interest rates to continue going upwards. We can think of some examples as illustrative examples of this with currency policy and the other Fed activities. However, we can also think of the policy as being more important to the financial situation than foreign currency exchange rates as a whole, because the central bank has so dramatically increased its ability to increase interest rates. The use of foreign exchange rates should not be a means to force policymakers to adopt a policy of “excess demand for money.” Rather, because there is no money available for policy to carry out policy, foreign currency exchange rates should be viewed as the central bank’s primary means of determining what the Fed has to do to achieve its long-term objectives.
A second, more insidious example of the monetary policy of a short-run increase in interest rates comes from the fact that monetary policy has been used to increase the size and volume of the national debt (including interest costs). As explained by the Federal Reserve Bank of New York (1995):
Federal Reserve Bank of New York Chairman Jerome Powell stated: In the 1930s, large-scale government debt increased by more than 7 percent, causing an increase in the cost of debt servicing in every year or for the period of two years, an increase of almost 4 percent annually and
The economy functions in a cyclical way with recessions and expansions. When there is an expansion, banks will not hesitate to lend money as “loans are interest-earning assets, and in good economic times there is little to fear of borrowers defaulting” (McConnell & Brue, 2004, p. 264). When the economy is in a recession banks may be unwilling to issue loans as they doubt the ability of borrowers to repay. To promote economic stability, monetary and/or fiscal policies can be used to control the supply of money. The Federal Reserve is the regulatory body that implements monetary policy; this policy can be implemented in three ways.
The first tool the Fed uses is open market operations to buy or sell government bonds to commercial banks and the public. Buying bonds from commercial banks will increase the banks reserves. An increase in the banks reserve will increase the ability of the bank to issue more loans which will lead to more money creation. Buying bonds from the public has the same effect. Payment that is received from the Federal Reserve will be deposited into the commercial banks that will cause an increase in the banks reserves and the checkable deposits. Selling bonds will have the opposite effect on the money supply. When securities are sold to commercial banks, these commercial banks will pay for these bonds by drawing checks against their deposits. When the Fed collects these checks, it will in turn lower the reserve of the banks. This will lead to a reduction in the ability of the commercial banks to make loans. Securities that are sold to the public will also have the same effect on the money supply as the public will pay for these bonds with checks that will be drawn against the bank.
The second policy the Fed can use to influence the money supply is by manipulating the reserve ratio. The reserve ratio influences “the ability of commercial banks to lend” (McConnell & Brue, 2004, p.273). If the Fed decides to raise the reserve ratio, the excess reserves that banks have will decrease. The excess reserves decrease because banks are now required to have more money in their reserve ratios. “As a consequence, either banks lose excess reserves, diminishing their ability to create money by lending, or find their reserves deficient and are forced to contract checkable deposits and therefore the money supply” (McConnell & Brue, 2004, p.273-274). The opposite will happen if the Fed lowers the reserve ratio. Banks would now have more opportunity to lend money as their excess reserves would increase. “Lowering the reserve ratio transforms required reserves into excess reserves and enhances the ability of banks to create new money by lending” (McConnell & Brue, 2004, p.274).
The final tool the Fed uses to change the money supply is through the discount rate. As a “lender of last resort” the Fed will make short term loans to commercial banks if they need additional funds. The interest that is charged on these loans is known as the discount rate. “Borrowing from the Federal Reserve Banks by commercial banks increase the reserves of the commercial banks and enhances their ability to extend credit” (McConnell & Brue, 2004, p.274). If the discount rate is low commercial banks will be encouraged to borrow, while an increase in the discount rate will act as a deterrent to borrowing.
Influencing the money supply also affects the macroeconomic factors of the economy. The aim of every economy is to have high economic growth, low unemployment and low inflation. These factors are all influenced by monetary decisions as monetary policies act as an economic stabilizer. Through influencing the money supply, the Fed can implement easy money policies or tight money policies. Easy money policies are enacted when the economy is thought to be in a recession. Recessions are usually accompanied with high unemployment and low economic growth. To boost the economy the Fed might use a combination of their tools to increase the reserves of the commercial banks that will in turn promote lending. The subsequent result would be a decrease in the interest rate which will increase investment, aggregate demand, and equilibrium GDP. Open-market operations are directly related to the Federal fund rate as when the Fed buys bonds from the commercial banks the Federal fund rate decreases. This will in turn affect the prime interest rate and interest rates in general. According to William Thorbecke (2002),