Macroeconomic Impact on Business Operations

Macroeconomic Impact on Business Operations

Rodney E. Brooks

MMPBL/501

November 1, 2010

Dr. George Sharghi

Macroeconomic Impact on Business Operations

“Monetary policy is any policy related to the supply of money. As such, it would encompass various activities of the United States Treasury for those relating to foreign exchange operations and the receipt and disposition of public funds can affect the supply of money. The dominant influence on the United States money supply, however, comes from the policies of the nation’s central bank, the Federal Reserve, and particularly those policies originating with its Board of Governors. Thus, a more realistic definition of monetary policy would be that it consists of the directives, policies, pronouncements, and actions of the Federal Reserve that affect aggregate

demand or national spending. Among these, the dominant action consists of open market operations. These involve the buying and selling of seasoned Treasury securities by the Federal Reserve. When Treasury securities are purchased, the Federal Reserve does so with newly created money. This money can serve as reserves for the financial system and allows commercial banks and other depository institutions to make new loans and investments, thereby expanding the money supply and aggregate demand. The opposite happens when the Federal Reserve sells

government securities.

Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus...