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Macroeconomic Impact on Business Operations

Shyanna Liggins

University of Phoenix

Macroeconomic Impact on Business Operations

In this paper, I will identify the tools used by the Federal Reserve to control money supply and how the tools are used to influence money supply and macroeconomic factors. In addition, I will explain how money is created and which combinations of monetary policy help you to best achieve a balance between economic growth, low inflation and a reasonable rate of unemployment.

Three tools are used by the Fed for monetary control: Open-market operations, the reserve ratio and the discount rate. The tools are used to alter the reserves of commercial banks. The Fed can influence money-creating abilities of the commercial banking system through the use of the tools listed above.

Open-market operations

Open market operations are the Fed’s most important instrument for influencing the money supply (Brue & McConnell, 2004). These operations consist of the buying and selling of government bonds to the public and commercial banks. When purchasing bonds from either the commercial banks or public, the reserves of the commercial banks will increase. Federal Reserve bond purchases from commercial banks increase the actual reserves and excess reserves of commercial banks by the entire amount of the bond purchases. (Brue & McConnell, 2004). Federal Reserve Bank purchases of bonds from the public increase actual reserves but also increase checkable deposits when the sellers place the Fed’s check into their personal checking accounts (Brue & McConnell, 2004). In both instances the end result is the same. When the banks lend out their excess reserves, the nation’s money supply will rise.

When selling government bonds the commercial banks’ reserves are reduced. If all excess reserves are already lent out, this decline in commercial bank reserves produces a decline in the nation’s money supply (Brue & McConnell, 2004). The end result...