Macroeconomic Impact on Business Operations

Macroeconomic Impact on Business Operations

Warren

University of Phoenix

MBA 501

October 23, 2006

Introduction

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