Macroeconomic Impact On Business Operations Essay

1876 words - 8 pages

Macroeconomic Impact on Business Operations

This paper will discuss the objective of monetary policy and its influence on the performance of the economy as it relates to such factors as inflation, economic output, and employment. Monetary policy affects all kinds of economic and financial decisions people make in this country, whether to get a loan to buy a new house or car or to start up a company, whether to expand a business and whether to put savings in a bank, in bonds, or in the stock market. Furthermore, because the U.S. is the largest economy in the world, its monetary policy also has significant economic and financial effects on other countries. ...view middle of the document...

Lastly, the discount rate is the interest the Federal Reserve Banks charge on the loans they grant to commercial banks. Changes in the discount rate typically occur in conjunction with changes in the federal funds rate. Through the discount rate, Federal Reserve Banks lend funds to depository institutions. All depository institutions that maintain transaction accounts or non-personal deposits subject to reserve requirements are entitled to borrow at the discount rate. The Fed implements these tools to set the nation's monetary policy to promote the objectives of stable prices, moderate long-term interest rates, and maximum employment.
When prices are stable and believed likely to remain so, the prices of goods, services, materials, and labor are not distorted by inflation and therefore contribute to higher standards of living. Additionally, stable prices foster saving and capital formation, because when the risk of erosion of asset values resulting from inflation and the need to guard against such losses—are minimized, households are encouraged to save more and busi¬nesses are encouraged to invest more (Board, n.d.).
Beyond influencing the level of prices and the level of output in the near term, the Fed can contribute to financial stability and better economic performance by containing financial disruptions and pre¬venting their spread outside the financial sector. Modern financial systems are complicated and may be vulnerable to wide-scale systemic disruptions. The Fed enhances the financial system's resilience to these types of disruptions through regulatory policies geared at banking institutions and payment systems. If a threatening disturbance develops, the Fed also cushions the impact on financial markets and the economy by aggressively and visibly providing liquidity through open market operations or discount lending.
The Federal Open Market Committee (FOMC) exercises a great deal of control over the federal funds rate through its influence over the supply of and demand for balances at Federal Reserve Banks. The initial link in the chain between monetary policy and the economy is the market for balances held at the Federal Reserve Banks. The FOMC sets the federal funds rate at a level it believes will foster financial and monetary conditions consistent with achieving its monetary policy objectives, and it adjusts that target in line with evolving economic developments. A change in the federal funds rate, or even a change in expectations about the future level of the federal funds rate, can set off a chain of events that...

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