Economics

Macroeconomic Effect on Business Operations

MMPBL/501 Forces Influencing Business in the 21st Century

Macroeconomic Effect on Business Operations

In the nineteenth century, governments established national banks in which private banks were required to replace their own reserves (Heilbroner & Milberg, 2008, p. 114). In the United States, this was a very difficult task, but in 1913 the Federal Reserve system was established and the monetary policy emerged. This allowed the Federal Reserve to control the quantity and circulation of money in the banking system. Today this is an important policy because its use can help in restoring economy growth.

This presentation will take a look at the monetary policy, the tools used to control the money supply, how these tools influence money supply, and the combinations of the monetary policy achieving the best balance.

Monetary Policy

The monetary policy is another instrument to deliberately change the money supply to have an influence on interest rates, which in turn controls the level of spending in the economy (McConnell & Brue, 2004, p. 268). In 1913, the United States banking took its current form where the Federal Reserve system was created. This consisted of 12 Federal Reserve Banks and a National Board of Governors around the nation (Heilbroner & Milberg, 2008, p. 114 ). All important banks were required to reserves in the Reserve bank of their district. This resulted in the Federal Reserve the ability to control the amount of money as a whole. The increasing or decreasing of percentages of customer deposits that member banks could keep at their local central bank as reserves allowed the system to increase or decrease the ability of member banks to make loans. The raising and lowering of interest that central banks charged member banks controlled the ability of private banks to lend to their customers. “The Federal Reserve system became the U.S. “monarch” in charge of the money in circulation...