How Business Affects The Economy Essay

1046 words - 5 pages

How Business Affects the Economy

In most countries, business is the primary section of its economy. Businesses are what drive an economy up or down. A key component of how well businesses help the economy are the entrepreneurs. These brave risk takers put it all out on the line: time, money, and other resources in hopes to start a business and make a living. As they make money, they spend it helping other businesses blossom. This creates a prosperous cycle for all involved. Since these businesses flourish, this creates the needs to jobs for those who need them. All in all, the standard of living increases across a wide span area, as well as the quality of life due to many families ...view middle of the document...

The government accomplishes this by using two main tactics. The first is known as fiscal policies. Fiscal policy refers to the taxation and spending the government does to influence the economy. By reducing taxes, people will have more money in their pockets especially during a recession. This in turn will stimulate economic growth. The government can also spend more during recessions by providing more jobs. A prime example of this was the 2009 Economic Stimulus Package. Here, the government allotted for $787 billion to be spent to save/create jobs, encourage spending, and stimulate business production. The second tactic that government may employ is the use of monetary policy. This refers to what the Federal Reserve Bank does to influence interest rates and the amount of money in the United States economy. The Federal Reserve Bank utilizes three tools in monetary policy to accomplish its goals. These include open market operations, discounted rates, and reserve requirements.
Open Market Operation – The most flexible, therefore used the most. This is the buying/selling of financial instruments such as securities from the US Treasury. These include bonds, notes, and bills. By paying the sellers of the securities, money is put into circulation that the Federal Reserve Bank is holding. As a result, stimulates spending.
Discount Rates – The interest rates charged by the Federal Reserve Bank to banks. For example, if the interest rates are decreased then banks can make more loans to customers, due to lower interest rates on those loans. This allows more customers to take out more loans, spending the money, and influencing the economy.
Reserve Requirements – Most likely used tool. These are stated percentages of funds that are held or maintained in vaults or deposited. They are primarily used to protect the depositors, in case they need to withdraw a large amount of money at one time.
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