Macroeconomic Impact on Business Operations

Macroeconomic Impact on Business Operations

Monetary policy is a tool that a national Government uses to influence its economy. This policy controls the money supply, influences interest rates and overall economical activities.

Monetary policy does have an affect on different macroeconomic factors. Such factors are GDP, which stands for gross domestic product, unemployment, inflation, and interest rates. The monetary policy affects all sorts of economic and financial decisions that consumers tend to make.

The goal for monetary policy is to achieve and main price-level stability, full employment and economic growth (McConnell and Brue, p. 268). It affects the consumer when they are trying to obtain a loan to purchase a new house or car or to even start a company, whether to expand a business or whether saving money in the bank. Furthermore, because the United States is the largest economy in the world, its monetary policy also has significant economic and financial effects on other countries. Monetary policy that persistently attempts to keep short-term real rates low will lead eventually to higher inflation and higher nominal interest rates, with no permanent increases in the growth of output or decreases in unemployment.

Inflation is the loss in purchasing power of a currency unit such as the dollar, usually expressed as a general rise in the prices of goods and services. When inflation occurs, fewer products and services are purchased. How does monetary policy affect inflation? Policy also affects inflation directly through people's expectations about future inflation. For example, suppose the Federal Reserve Bank eases monetary policy. If consumers and businesspeople figure that will mean higher inflation in the future, they will ask for larger increases in wages and prices.