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Macroeconomic Focus and Industry Analysis

Macroeconomic forecast of the monetary school of thought.

From a monetarist perspective, regulation of the flow and circulation of money is important in determining and influencing preferred economic conditions in the United States. Reducing the circulation of money in the economy has many effects on the macroeconomic environment and determines the activities of other stakeholders in the financial market. From a monetarist school of thought, the government has sole responsibility to both country and citizens in ensuring favorable monetary policies are implemented that are akin to the prevailing economic conditions through the control of inflation and prevention of deflation in the country (Fair, 2011).

Reducing the supply of money in the economy has effects on the macro-economic Cory Kanth:

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environment as earlier mentioned. Reducing money circulation has both short run and a long run effect that shift practices in the economic environment. For instance, consumer spending is affected by the implementation of monetary policies. When the government implements monetary policies that do not favor money circulation, consumer spending capabilities are significantly reduced (Fair, 2011). The reduction in the spending is due to the reduced flow of money in the financial market which limits the funds accessible to consumers in the market. This policy is usually exercised in a bid to control inflation in the market where prices go up due to increased demand catalyzed by the availability of money in the hands of the spenders.

Reducing the growth of money circulation from a monetary perspective is empirical in determining the cost of labor. When there is a circulation of money in the market, individuals can opt for willing unemployment due to the availability of funds through other sources other than the low paying jobs (Gnimassoun & Mignon, 2015). Further analysis on the effect of reducing money circulation is the government stabilizes the prices of labor meaning little choice is left for personnel who may discriminate employment due to reduced wages or low salaries.

Investment spending is a factor directly affected by the increase in interest rates. This is because investors avoid high lending rates due to high interests that are amassed over operational periods. Moreover, increased lending rates affect investment spending since capital and sources of financial revenue are diminished when the government raises the rates (Gnimassoun & Mignon, 2015). Furthermore, the increase in lending rates to discourage borrowing gradually leads to a reduction in economic activities in the country during the period of implementation.

However, there is uncertainty in the effect of reduced money supply on the above macroeconomic factors. The uncertainties are such as lagged effect on the economy. This is whereby the desired changes arising from the implemented policies are delayed due to other micro economic and environmental factors. Citizens may react differently to changes in the supply of money by holding back available funds as a means to secure employment. This can thus lead to a downward spiral in the economy.

Expected directions of change

From a monetarist point of view, the reduction and limitation of supply of money in the economic environment are expected to reduce consumer spending. Consumers spend only when they have money or the capability to spend through liquidating assets. However, reducing money supply aims to reduce and limit consumers` capacity to spend. This, in turn, is empirical in stabilizing prices in the market and reduces the probability and effects of inflation. Investment spending is expected to significantly reduce due to the reduction of investors’ capability to spend owing to burgeoned and ballooned interest rates (Wohlrabe & Buchen, 2014). Moreover, the cost of labor is expected to stabilize or reduce albeit gradually to establish a favorable equilibrium. However, uncertainties such as the extent of labor price determination and investment spending can behave differently. When investors anticipate or forecast increase in lending rates, they might hold on to their funds and acquire loans in excess during the lucrative trading period Cory Kanth:

good explanation in this area

. This move will reduce the impact intended by the government on reducing investment rates as sown in figure 1 ("Monetary Policy", 2016)

Industry analysis

The credit industry will feel the effect of the government`s monetary policy. This is due to the Federal Reserve`s move to increase the rates of lending to reestablish the productive equilibrium in the financial market. Increased interest rates by the Fed will lead to a ripple effect which is intended to trickle down to the final consumer. Therefore, during the period of monetary policy implementation, the reduction of the money supply will, in turn, affect the borrowing and lending behaviors of clients. Consumers and investors will avoid servicing loans throughout the period as they wait for the rates to reduce. The industry will benefit from the monetary policy in the long run as inflation, in the long run, is curbed. Furthermore, the move to decrease the supply of money will lead to a rise in the cost of loan rates which will enhance credit issuers’ earnings although the margin of returns will significantly reduce.

Impacts on international competitiveness

With the stipulated loan rates, the loaning power of the financial institutions will be enhanced will reducing accessibility due to high-interest rates. In the international scene, the credit facilities operations can go two ways. Either the institutions can enhance their financial activities in oversea markets due to an upsurge in economic reserves due to reduced borrowing. The reduced borrowing means that the industry retains more finances for economic development in other ventures (Wohlrabe & Buchen, 2014). Contrastingly, the financial activities can also affect the industry`s international competitiveness by reducing anticipated revenue or period of interest rate turnover due to reduced activities in the industry of interest. The figures are shown in figure 2 below ("Monetary Policy", 2016)

The profitability of a loaning institution will decrease in the short run with a probability of increasing in the long run due to high rates of interest. This means that most firms and institutions will be affected by short-run changes in the economic sphere owing to reduced activity of consumers in the credit industry. However, in the long-term, the institutions can increase income from the implemented rates and other changes in both the macro and micro environment.

Conclusion

Reducing the circulation of money in the economy is an important federal government move in regulating financial activities. In achieving immediate intended financial changes, the policy is efficient in influencing short run modifications in a country`s economy. Additionally, reducing spending and cost of labor is important in restructuring a tiring economy by reducing intentional unemployment and over spending. However, it is important to understand the need for proper policy implementation to ensure that proper policies are enacted. For instance, regulating the reserves in the Federal Reserve for financial institutions is not commonly utilized as it stagnates the industry by limiting the activities of financial institutions.

Understanding different policies, as well as the available schools of macro-economic thoughts, enables a manager to make informed financial decisions. Additionally, for the government to efficiently carry out its responsibilities of protecting and monitoring the country`s economy, it is important that all possible considerations are made especially from both monetary and fiscal point of views. One approach is never enough to sustain and support a country`s economy. The mix obtained from analyzing different factors and different insights from different macroeconomic models offer valuable insight on financial and economic management.

References