Question

Economics: I have Walmart Neighborhood Market as my company. Would love some insights, and ideas for the following.

1.Describe the characteristics of the current monetary policy and fiscal policy in the United States.

2. Predict how possible changes in monetary and/or fiscal policy may impact the supply and demand of the product or service produced by the company you selected as well as the financial performance of your chosen company.

Answer 1

Characteristics of current monetary policy:

Monetary policy refers to policy actions by central banks such as Federal Reserve in US to achieve certain goals like price stability, full employment & stable economy. When a country’s economy grows in a rapid manner resulting in higher inflation levels central banks tighten the monetary policy by raising interest rates & reducing money supply which results in controlling inflation. If economy is in recession central banks will cut interest rates to decrease cost of borrowings & increase money supply to increase investments.

Federal Reserve has been given responsibility to achieve goals of price stability, maximum employment & to maintain moderate long term interest rates, which makes most of its monetary policy actions. It targets short term interest rates & influences availability & cost of credit in the economy. Federal Reserve uses three policy tools to stimulate such as open market operations, change in reserve requirements for banks & federal funds rate.

Open market operations: This is a primary tool used by Fed to influence the supply of bank reserves. This refers to buying & selling of securities such as treasury bills & & bonds in open market by Fed. Federal Reserve uses open market operations to adjust the supply of reserve balances to control federal funds rate. Federal open market committee meets eight times a year to review policy & set interest rates. In its current monetary policy FOMC has decided to gradually increase interest rates to simulate economy. There have been moderate consistent increase in interest rate from 2015.

Federal funds rate: This is an important policy tool in monetary actions of Fed. Federal funds rate is the rate which a bank charges to another bank for short term loans. Fed changes federal funds rate target to affect short-term interest rates. If FOMC reduces its target for federal funds rate, the rate of return paid to holders of US treasury bills or debt securities declines. If FOMC increases its federal funds rate target, short term interest rates also increase.

Inflation targeting: Fed has consistently targeted inflation rate to maintain stable prices in the economy. Fed targets inflation rate by influencing interest rate & money supply in the economy. An environment of stable prices is most suitable for employment generation in the long run.

Characteristics of current fiscal policy:

Fiscal policy is about how government adjusts its spending & taxation to stimulate growth in economy. When a country’s economy grows in a rapid manner resulting in higher inflation levels central banks tighten the monetary policy by raising interest rates & reducing money supply which results in controlling inflation. If economy is in recession central banks will cut interest rates to decrease cost of borrowings & increase money supply to increase investments.

US Is currently more focused on fiscal policy as under Trump administration government has decided to cut household taxes & corporate taxes to boost growth. Government spending in US has effects on every sector. Federal government is more focused on spending on infrastructure, defense, & security. Federal government has changed discretionary spending by increasing defense budget by $54 billion. The current government is inclined towards reducing its spending on health care benefits such as Medicaid & Medicare as well as decreasing tax rates on individuals & corporates.

2) Effects of fiscal policy on business (Walmart):

As discussed above fiscal policy is government adjustment of its spending & taxation. If government adopts expansionary fiscal policy to boost economic growth it will increase its spending & reduce taxes. As a result money supply will increase in the economy. This will increase demand for goods & services. As demand increases production will also increase & company may need to hire more people. Walmart will get more business as people will have more money to spend at stores which results in higher profits. Walmart will find it easy to borrow money for the purpose of expansion of business to other regions. Due to the reduced taxes profit margins will increase as more money is saved.

If government adopts contractionary monetary policy by reducing its spending & increasing taxes it results in decreasing money supply in the economy. This will decrease demand for goods & services. If demand decreases definitely production will decrease. Walmart will get less business as people have less money to spend. This results in lower profits. As the tax rate increases profit margins will decline.

In another case if due to increased spending & reduction in taxes leads to crowding out effect then Walmart will find it difficult to borrow money for spending & investment.