Question

 

ECON545 Paper Project 2

The Macroeconomic Paper tests your ability to apply economic principles to a business decision considering the impact of macroeconomic variables. Select one situation from the items outlined below: A to D. Complete the paper on the selected situation as specified below. The completed paper is a professional report and is due in Week 6 (180 points). See the grading rubric at the end of this document. Be sure to use the DeVry library to find data, and avoid questionable sources, such as Wikipedia.

Each of the scenarios has a list of macroeconomic areas you are to address, with sources, in your answer. Briefly, you are to research and show how these apply to your scenario: GDP growth rate (20 points), the business cycle, unemployment, and inflation (40 points), fiscal policy and level of unemployment (30 points), monetary policy and interest rates (30 points), and demographics (10 points).

Situation A

Rick, your friend, runs a small manufacturing plant that produces parts for the auto industry. Rick is thinking of expanding his operations to meet the increasing demand from car manufacturers. Hearing of your taking this course in business economics, he asks you for advice on how to go about making the expansion decision.

You realize that Rick needs to take a number of macroeconomic variables into consideration for the expansion decision. You decide to research the economy in terms of GDP growth rate, interest rates, level of unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. You want to provide Rick with the most informed advice possible.

Situation B

Your neighbor Cindy wants to start a contracting business for installing solar panels. She has heard of the cost savings that households and businesses can make each year by installing solar panels on their roofs. Cindy has also heard of government incentives for installing solar panels. Being concerned about the environment and wishing to reduce pollution, Cindy thinks installing solar panels also serves a good social purpose. But she does not want to risk her life savings on a venture that might not succeed or become profitable enough. After hearing from you about taking this course in business economics, she decides to ask you for advice.

You realize there are more pieces to the decision than Cindy is considering. You decide to research the economy in terms of GDP growth rate, interest rates, level of unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. You want to provide Cindy with the most informed advice possible.

Situation C

Cousin Edgar is always thinking of the next business idea. This time, he plans to invest in buying four gas stations. He reckons American consumers have come to accept the high gasoline prices, and estimates world prices for gasoline to increase even further with high demand from India and China. Besides, Cousin Edgar thinks he will make a good profit on the sale of convenience items at each station. But before buying the gas stations, he decides to ask for your advice because you are taking this course in business economics.

Cousin Edgar needs financing for his new business, but you realize there are more macroeconomic factors he needs to consider in timing his decision. You decide to research the economy in terms of GDP growth rate, interest rates, level of unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. You want to provide Cousin Edgar with the most informed advice possible.

Situation D

After hearing of you taking this course in business economics, Uncle Dan has e-mailed you asking for advice on his 100-acre corn farm. He mentioned how, after 30 years of growing corn, he wishes to leave that commodity's market and enter a more profitable market instead. He is thinking of subdividing his land and building homes and shops. He reckons he could make a good profit by selling the homes and renting the shops.

Recognizing the costs and risks for Uncle Dan in making the switch, you decide to research the economy in terms of GDP growth rate, interest rates, level of unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. You decide to educate yourself about macroeconomics so that you can provide Uncle Dan with the most informed advice possible.

Macroeconomic Paper as a Professional Report

Your paper should be organized into five parts as listed below.

1.      Name, class, and date

2.      Introduction to situation but do NOT copy the scenario. Briefly summarize the situation and identify the macroeconomic issue(s) to be decided from the perspective of the organization.

3.      Business cycles, unemployment, inflation, international—comparative advantage, exchange rates, trade, etc., monetary policy and interest rates, and fiscal policy and unemployment. Identify the variables that are critical in addressing the issue(s). Gather and present the relevant data on the variables by searching the DeVry Online Library. Ask a librarian for help if needed. Use in-text citation to report the source(s) of the data. Graphs may be included here.

4.      Recommendations and Economic Justification

Formulate and present your recommendations for addressing the issue(s) based on the relevant data and economic principles identified above. Justify your recommendations in terms of the economic impact on those affected.

5.      References

List the full references for at least five sources

Grading Rubric

Section

Points earned

Points

Description

Paper Presentation

10

Good format, citations, lack of spelling errors, etc.

Relevant Data:

GDP, Business Cycle, International, Monetary Policy, Fiscal Policy, Demographics

130

GDP (20 points)

Business cycles, unemployment, inflation (40 points)

Monetary Policy and interest rates (30 points)

Fiscal policy and unemployment (30 points)

Demographics (10 points)

Recommendations

40

What are your recommendations explained by your analysis?

Total

180

A quality paper meets or exceeds these requirements

Answer 1

Situation-A

2) Rick is a owner of a small manufacturing plant that produces automobile parts for car industry.Now,based on the information presented,it can be assumed that Rick is a small business owner and he intends to expand his business from small scale to medium or perhaps large scale firm.In this pursuit,like any other typical business/commercial expansion Rick has to undertake a thorough research about market situations,overall maroeconomic scenario of the country,business policy updates with connection to both fiscal and monetary measures,business investment scenario,international trade situations,overall consumer demand,GDP growth rate and so forth as a part of the SWOT Analysis for potential business growth.This report formally addresses many of these issues with the objective to assist Rick in his pursuit to attain long term commercial success.

3) Now,prior to emphasizing on the market research on national or local level,Rick has to be informed about the overall macroeconomic conditions in the economy that would expectedly affect his business in the long run.It would determine his potential customer base in addition to his existing customer hold,future investment required for business expansion,estimated profit analysis following the expansion and the vulenarability of his business in future and how to deal with the risk factors and business uncertainties(as part of risk management in business).First,the GDP growth rate in US has shown a slow but stable growth rate of around 2-3% during the 1st quarter of 2018 and is expected to follow similar trend during the 2nd and 3rd quarter of the year as well.As a sign of optimism for Rick,the overall consumer spending reflects a positive pattern with an increase from 5% to 8% for durable and non-durable commidities from the last quarter of 2018 to the first quarter of 2018.The consumer spending situation for autombile industries has also improved during the first quarter of 2018 compared to a major slump during November and December of 2017.The rise in disposable and reduction in savings rate have collectively contributed toa recent rise in overall consumer spending providing a major hope for small business such as Rick's despite a slow growth rate in GDP and Aggregate Supply (Bachman and Majumdar,2018).

Secondly, with the subsequent intention to stimulate overall production level and Aggregate Supply,the government has recently undertaken a major fiscal reform reflecting a business tax reduction from 35% to 21% for all major sectors with the elimination of certain corporate tax breaks. The fiscal reform might induce a postive impact on the production level in the country by leaving more cash on corporate blance sheets and generate higher investment spending (OECD Economic Outlook,2018).Hence, conducive fiscal reforms such as this could benefit small and medium businesses to have cash holding and investment spending for future expansion.However,new investments would depend on other financial considerations such as interest rates and depreciation rates.According to the data reported by Deloitte Insight,the overall corporate profits have actually recovered from 2-3% during last quarter of 2017 to a remarkable 10% during the first quarter of 2018 following the tax break implemented by the government.In consideration of the recent monetary policy,the Federal Open Market Committee has slightly increased the interest rate from 1.7% in December 2017 to 2.1% in first quarter of 2018 avoiding without much fluctuation to control inflationary preasures in the future (Amadeo,2018).Based on the Federal Reserve report,the inflation rate has been registered to be approximately 2% during the first quarter of the current year and is forecasted to remain between 1.5% to 2% during the rest of the year.Hence,a consistent conservative monetary approach by the Federal Reserve has checked the inflationary impacts quiet considerably which also indicates a positive outlook for small businesses such as Rick's as limited monetary fluctuations would expectedly bring higher business stability and relatively lower uncertainty in long run(Yellen,2017.

Thirdly,the recent occupational outlook published by the Bureaue of Labor Statistics(BLS) projects an overall increase in total employment level in the country of about 20.5 million from 2010 to 2020.It also expects an absolute recovery from the recesionarry effects of 2008 by 2020 with an unemployment rate of about 4% and almost reaching full employment (Amadeo,2018).Furthermore,inclusion of more technological endowments in production,better work safety,employment regulations,growth of service and inormal sectors will also induce higher workforce participation in businesses.Therefore, evidently the recovery from recession in certainly underway as with business growth and expansion the employment level will also rise optimistically.Furthermore, the maufacturing sector is expected to grow faster than the overall economy providing a strong hope for Rick.

Fourthly, the change in Balance of Trade(BOT) for the US economy shows a balanced trend in recent times with an equal growth rate in both overall export and import level of around 3%.The actual BOT regietered a positive balance of $72 billion in December 2017 thereby indicating a higher value of imports than the exports(Bachman and Majumdar,2018).As reported by the Deloitte Insight,the import level has been registered to be around 5%compared to about 4% for the export level during the first quarter of 2018.The depreciation of dollar mainly against, Euro and Canadian Dollar during the end of 2017 and the beggining of 2018 essentially alludes to higher demand for US exportable goods and services and the continuation of the depriciating trend would expectedly increase the export level for US in the future.The country's trade relations with the Eurozone,Canada and Mexico have improved recently but however,the macroeconomic crisis in Greece and Brexit issue have caused some concerns pertaining to international trade and diplomatic relations.

4) Based on the current trend analysis of the macroeconomic scenario in the country and future projections,thee factors that could work in favor of Rick are stable inflation in recent times and in near future based on projection,conservative monetary policies by the Fed(especially projected low interest between 1.5-2% in future),rising trend in overall consumer spending and manufacturing sector,conducive fiscal measures to stimulate Aggregate Supply and empirical expectations of increase in export level of the country due to consistent currency depreciation.Now, some of the factors that might hold back Rick at least in the short term are slow GDP growth rate,continual fiscal deficit thereby affecting fiscal spending/expenditure on infrastructure and development,uncertainty about new business investment for expansion due to conservative nature of the monetary policy and the demographic changes which are based on domestic socio-economic and immigration policies.However, as an opimistic and pro-active business leader Rick should take advantage of the favorable factors and undertake the expansion decision.The fiscal relaxations for business growth might benefit small businesses like Rick to enhance overall profit share(holding all other factors constant) which might provide higher investment spending for Rick to expand in future.Additionally,higher consumer spending indicates greater consumer confidence and overll demand which will expectedly enhance the sales revenue in current times or future and depending on diversified consumer habits and preferences Rick can modify his manufacturing methods following expansion.

Furthermore,if Rick decides to expand in future,he can extract the advantages of sustained dollar depreciation with higher export demand in international market.With global expansions of Eurozone car companies(Benz,Wolksvagen,Chevrolet,BMW) etc. Rick can enhance his profit share by capturing some of the foreign clients or market as well.A gradual recovery of the recession and the rising manufacturing demand in domestic economy and dynamic pattern of consumer taste and preferences would also enable Rick to diversify his products and services to earn higher sales revenue.As part of the financial investment for expansion,Rick can use his current investment spending and also take future business loans by taking advantage of conservative interest rate policy by Fed implying a stable and relatively low interest rate between 1.5% to the target rate of 2%.To safeguard against future interest rate and inflationary fluctuations Rick can also get into a contract system with a locked/fixed interest rate which will be unaffected by any inflationary changes in future and other potential macroeconomic changes.Nonetheless,as a part of Fed's commitment to restrict inflationary preasures,both the inflation and interest rate are projected to remain stable at least for the near future providing some security against future business uncertainty for Rick.Therefore, considering the immense commercial benefits that expansion can bring relative to the downsides,Rick might want to take advantage of the current and forecasted macroeconomic trends and undertake the decision.

5) Reference

https://www2.deloitte.com/insights/us/en/economy/us-economic-forecast/2018-q1.html

https://www.focus-economics.com/countries/united-states

http://www.oecd.org/unitedstates/united-states-economic-forecast-summary.htm

https://www.thebalance.com/us-economic-outlook-3305669

https://www.federalreserve.gov/newsevents/testimony/yellen20171129a.htm