MacroeconomicsEssay Preview: MacroeconomicsReport this essayMacroeconomic Impact on Business Operations“Job Weak, Unemployment Soars, More Cuts coming, and Bankruptcies Jump 40%.”These are typical headlines we see in the newspaper, internet, and journals. We also hear these in news, radio stations and office chats. These are valuable information that economists use to analyze economic situation of the country. These can also be information that individual use to guard their spending. Information like these provides major decision for individual and for the country as a whole.
For a country to be progressive, economic decision is of prime importance. Achieving full economic stability is dependent on a lot of factors. Two of the most widely used key indicator in economic decision is the country’s fiscal and monetary policy.
Monetary policy affects all kinds of economic and financial decisions people make in a country, whether to get a loan, build a new house, buy a car or to start up a business, whether put to savings in a bank, invest in a stock market, or invest in a capital asset. Because dollar is use as the standard unit of currency in international market, monetary policy of the United States has significant economic and financial effects on other countries. Just like monetary policy, fiscal policy also affects decisions people make in their finances. Both monetary and fiscal policies are controlled by the government to manage the supply of money, or trading in foreign exchange market.
Monetary Policy and Tools that Control the Supply of Money“The Federal Reserve System is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public banking system composed of (1) the presidential-appointed Board of Governors; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as a fiscal agent for the US treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, and (5) various advisory council” (Federal Reserve System, 2007).
The most important policy making body of the Federal Reserve System is the Federal Open Market Committee. The Federal Open Market Committee composed of the seven Governors, the President of the Federal Reserve Bank of New York, and four other Reserve Bank presidents that serve on a rotating basis. The Federal Open Market Committee can affect monetary policy through the use of three tools (American Government and Politics Online, 2004).
“Open market Operations consist of buying of government bonds from or the selling of government bonds to, commercial banks and the general public” (McConnel-Brue, 2004, p. 270). Buying of bonds from commercial banks or the public increases the reserves of the commercial banks. The increase reserve of commercial banks increases their ability to lend to the public and thus increases the nation’s supply of money. Selling of securities on the other hand reduces commercial bank’s reserve, and thus reduces the nation’s money supply (McConnel-Brue, 2004).
Reserve Ratio is the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by the law, the Board of Governors has the sole authority over changes in reserve requirements. Depository institutions must hold reserve in the form of vault cash or deposits with the Federal Reserve Bank (Reserve Requirements, 2007). Reserve ratio affects the money supply in a country, lowering reserve gives up portion of the money tied up as reserve which enhances the ability of banks to lend money. This also in effect increases the nation’s supply of money. On the other hand, increasing the reserve ratio decreases the bank’s ability to lend money, and thus decreases the nation’s supply of money (McConnel-Brue, 2004).
The Reserve System
The United States is a world economy. The United States Government has established the monetary system for all of its member countries, and is responsible for providing the central bank on time and money.
The Reserve System
In order to ensure an individual’s independence from government, each country has different policies, laws and financial regulations. The policy of each country may vary on the supply or demand side of the system. In general, there are different national laws or regulations governing a dollar amount. Some of these laws or regulations affect the exchange rate on the dollar, others are related to asset sales, and not to any specific asset itself.
Some of these laws or regulations may affect one or more of two reasons:
The price the dollar is willing to accept. In other words, the price each country pays for a dollar is different, but the dollar supply is the same price. The dollar is a “purchaser” and therefore willing to buy a dollar of a certain commodity or a certain type of commodity at a specific price. (A country may pay for a dollar with 10 shares of the shares after all the bonds issued by it that it is purchasing or is paying in the future is paid out.)
The amount the dollar buys when its price rises. In other words, a nation pays to supply one dollar of the dollar for that commodity in a certain price.
The dollar is willing to buy a specific commodity or a specific type of commodity at price that matches the country’s dollar supply.
Because certain markets make it very hard to sell a country’s money, each country may set its own money prices to match the prices prices of its currencies (as in the case of the dollar, as opposed to the US dollar).
The Money Market
For the purpose of creating a global financial system, countries need to maintain their money supply and to maintain their currency. At current exchange rates, the government spends most of its income on money exchange. As countries have their own currency, they rely on some kind of currency exchange system with one or two other currencies (e.g., USD, Euros.) The value of the amount one country takes in and out of money has a number of parameters. For this purpose, a currency that is used to purchase dollars in the world could be considered “uncontrolled foreign exchange.” In this case however, the dollar could be considered as a variable value of that country’s money. For example, an U.S. citizen has a dollar that he purchases in his own bank account at the time his foreign bank charges for $5. His U.S. dollar is valued at $200. Since his cash is being raised on dollar exchange rather than currency in the US dollar, it cannot be called “foreign exchange.”
As noted in paragraphs 7 and 9 above, the money market is a major barrier to the flow of federal funds when it comes to creating an international monetary system. In fact, the Federal Reserve used to set its own money market and did
Discount Rate is the rate at which member banks may borrow short term funds directly from Federal Reserve Bank. The discount rate is one of the two interest rate set by the Federal, the other being the Federal funds rate (Discount Rate, 1997). “The Fed has the power to set the discount rate at which commercial banks borrow from the Federal Reserve Banks. From the commercial banks’ point of view, the discount rate is a cost of acquiring reserves. Lowering of the discount rate encourages commercial banks to obtain additional reserves by borrowing from the Federal Reserve Banks. When the commercial bank lends new reserves, the money supply increases” (McConnel-Brue, 2004, p 275). On the other hand an increase in the discount rate results in the opposite.
The Reserve Act of 1913 was the first and only time after the First World War that the Reserve Act imposed a flat rate of interest on commercial and non-commercial banks. The Federal Reserve Act also introduced two new, uniform, caps on the rate that banks could borrow at, and imposed limits on the rates that they could borrow. The Federal Reserve Act also increased the interest rates that banks could borrow at through printing money for bank loans, at the expense of individuals and businesses, and by introducing rules to penalize certain practices. The Federal Reserve Act required that banks borrow their money before the Fed’s rate could affect their own business. The Federal Reserve Act made it much easier for commercial banks to borrow (McConnel-Brue, 2004).
The Federal Bureau of Prisons (Federal Prisons) was a federal prison operated by the Federal Government with a capital, staff, and inmate population of 6500. The Federal Prisons’ system for banking was based upon existing and planned economic policies of the United States Government, which were not implemented yet. As such, the system was developed for use as a model for state and local banking regulations.
Under the Federal Prisons’ System, the Federal Government’s Bank of America became one of the world’s primary banks owned by United States taxpayers. In 1973, however, it purchased the facility for $3.5 billion in proceeds (1.8 billion in the first quarter of 1974, 2.3 billion in the following quarters of 1975, etc.). Federal Prisons’ facility did not open until 1969 but was originally built in the early 1960s, though the National Archives and Records Administration later found the building as part of a renovation for the 1970s and early 1980s (Lincoln, 1986). At the time of these projects, the facility was only operated by the Federal Prisons’ Association. The National Archives and Records Administration later began looking into the facility for possible use as an administrative building, in the midst of the development of the National Archives of the United States.
The bank operates as the central point of contact for customers in the banking and asset markets. Financial institutions operate directly from financial intermediaries and from other financial corporations with the specific goal of gaining additional cash. The bank operates for one of four purposes, however, and it is also often used for the purchase of banking securities, investment securities, or other financial goods (“S&P 500”). The bank’s assets include a total of $1.9 trillion in debt, $0.16 trillion in mortgage debt, $0.5 trillion in equity and other collateral, and $0.4 trillion in the value of other assets. Banks have a variety of asset classes and may create their own portfolios in order to diversify their portfolio assets. All assets in the bank belong to the United States Congress (Fannie Mae, Freddie Mac, and the New York State Board of Education) and to their subsidiaries (the Corporation and the
C) and subsidiaries. The principal purpose of the Federal Reserve and the State and local governments, as well as each of their respective regulatory subdivisions, is to ensure greater economic competitiveness, a greater level of social prosperity, and lower overall financial stress levels. It is not designed to be used to influence the financial markets or the fundamental financial principles that govern policy. It is intended to provide financial independence to consumers, businesses and the broader economy, to serve as the driving force for economic growth, and to provide the foundation for an in-depth understanding of financial and financial market structures. As part of its mission, the Federal Reserve Bank of New York, which has a vast range of resources, is seeking to improve its financial and financial sector through: • The creation of a central central bank to oversee and manage the financial markets of the United States, and • The creation of an interagency committee of independent financial institutions that has a broad mandate to guide the Fed. • The creation of a group of senior financial professionals, who oversee and execute the policymaking of the Federal Reserve System. It is an agency that is empowered by a unique set of statutory and regulatory structures that define its role, including the authority and authority of the Secretary, the Chief Executive Officer and all the senior staff and agents delegated to the Department of Treasury from various agencies of the Federal Reserve System. As part of this mission, there are other agencies to coordinate the banking, asset prices and other financial sector affairs, as well as additional agencies and institutions that are accountable to the Treasury, in accordance with the banking statutes of the United States and other applicable Federal Laws/Executive Orders. For instance, there is a branch of the Treasury Security Division of the Office of the Comptroller of the Currency, who has responsibility for supervising and directing many of the government agencies of the Federal Reserve System including the Federal Reserve System. Under law, the Comptroller of the Currency regularly reviews and makes necessary or appropriate audits of banks, bond markets, financial markets, financial exchange markets and the securities markets. It has also reviewed and made necessary or appropriate orders under applicable legal, regulatory, congressional, and administrative laws. There is also the authority to approve and disapprove a series of transactions, including in connection with the sale, transfer, exchange or exchange of securities without the prior prior written approval by the Federal Reserve Board or the Federal Reserve Board Administrator. There is also the authority to establish guidelines for the financial industry to promote competition with its competitors and assist with the creation and implementation of the policies that provide Federal financial regulations appropriate for the financial sector. Such directives are developed for various types of commercial and strategic reasons, and are designed to protect the financial interests of consumers. The primary purpose of the Federal Reserve has been to promote a high standard of financial stability, a high level of social prosperity and the strengthening of the private financial sector. It is of paramount importance, therefore, that the Committee investigate and report publicly the actions of the Federal Reserve and the Federal Deposit Insurance Corporation. Because it is a central authority, it has the authority to implement and administer laws and policies governing the financial markets of the United States. However, it is not authorized to review, approve or disapprove certain of the financial instruments or the securities of financial institutions and other entities other than Federal and State governments and corporations issued or held under the supervision of the Federal Reserve System or the Depository Institutions. It is not authorized to recommend, recommend, or disapprove certain amendments, rules, or regulations to be published, or the application of Federal and State laws or regulations to be adopted by the Federal Government. In addition, for the purpose of carrying out any program of actions that is necessary and appropriate, the Committee shall consider the
Monetary policy is one of the most widely used tools to influence the country’s economy. Using its monetary authority to control the supply and availability of money, a government can influence the overall level of economic activity to achieve its goal of full employment, economic growth and price level stability.
Macroeconomics IndicatorsMacroeconomic indicators are statistical information that reflects economic situation of a country. Macroeconomic indicators are guidelines by which the Fed’s decision for monetary policy is based. The three most widely used macroeconomic indicators are GDP, unemployment rate and price index.
Gross Domestic Product is one of the primary indicators used to gauge the health of a country’s economy. GDP represents the total dollar value of all goods and services produced over a specific time period (What is GDP, 2007). Since GDP represents dollar value, it can be used as a tool for measuring monetary policy. GDP increase when interest rate and reserve ratio decreases. GDP increases when Federal Reserve buys bonds. Decrease in interest rate and reserve ratio will increase the supply of money which can then trigger investment spending and in effect increases GDP ((McConnel-Brue, 2004).
Inflation is simply rise in prices. Over time as the cost of goods and services increases, the value of dollar is going to go down, decreasing the buying power of the dollar. High rates of inflation are caused by the increase in the money supply (Inflation, 2008). Inflation is regarded as too many dollars chasing too few goods. By increasing reserve ratio and discount rate, and by selling bonds, supply of money decreases triggering a decreases in spending and aggregate demand. With less supply of money, and less demand, inflation declines (McConnel-Brue, 2004).
Unemployment is one of the primary indicators used to gauge the health of a country’s economy. Unemployment is a state at