Macroeconomic Impact on Business Operations
The U.S. economy is known as one of the largest economies in the world. Even though U.S. monetary policies greatly effects other countries economic and financial industries, the focus here will be how it affects or influence the performance of the economy in relation to economic growth, inflation, and the unemployment rate. There are tools used by the Federal Reserve System, the nation’s central bank, to control “the money supply to influence interest rates and thus the total level of spending in the economy” (McConnell & Brue, 2004, p.268). These tools not only influence money supply, but also in turn affect macroeconomic factors. These factors are the Gross Domestic Product (GDP), inflation rate, and the unemployment rate. The money supply can also be influenced by its creation through the banks. There are several recommended monetary policy combinations that will best achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment.
Tools Used to Control and Influence Money Supply
There are several tools used by the Federal Reserve to control and influence the money supply. One tool that the Federal Reserve uses is Required Reserve Ratio. It is a specified percentage of a bank’s own deposit liabilities that is required to be kept on deposit with the Federal Reserve Bank or in their own vaults. “The Fed (Federal Reserve Bank) has the authority to establish and vary the reserve ratio within limits legislated by Congress” (McConnell & Brue, 2004, p.254). If the ratio is decreased, banks are required to hold less in reserves and can lend that much more to customers, thus increasing the money supply. If the ratio is increased, the money supply into the economy will decrease.
Another tool that is used by the Fed is the Federal Funds Rate (FFR) along with the Discount Rate (DR). As discussed earlier, banks are required to have reserves with the Fed or in their vaults. The amount the...