Question

as a manager a good understanding of the macroeconomic environment is important to inform your business decisions. using relevant examples of business. in your answer discuss the effect of both increasing and decreasing trends on the business.

a. fluctuations of the GDP.

b. fluctuations of the interest rate.

c. fluctuations of the exchange rate.

Answer 1

Ans.

a.

The business cycle is a direct result of short- term fluctuations of real GDP. It consists of periods of economic expansion and contraction. In an expansion, real GDP is increasing, the unemployment rate is declining, and capacity utilization is rising. In a contraction, real GDP is decreasing, the unemployment rate is rising, and capacity utilization is declining.

b. Fluctuations of the interest rate.

Changes in the interest rates can impact the business cycles.

A reduced interest rate will increase the money supply and shift the AD curve to the right so that each price level corresponds to a higher level of income and expenditure. There are various channels through which the additional expenditures may be induced. For example, the interest rate reduction required to induce investors to hold the additional money balances will encourage companies to investment more and households to borrow to purchase durable goods, such as cars. In addition, banks may facilitate greater expenditure by raising credit limits and loosening credit standards. Conversely, a reduction in the money supply shifts the AD curve to the left

c. Fluctuations of the exchange rate

Exporters’ profits might decline if the rise in interest rates causes the country’s exchange rate to appreciate, because this would make domestic exports more expensive to overseas buyers and dampen demand to purchase them. The fall in asset prices as well as an increase in prices would reduce household financial wealth and therefore lead to a reduction in consumption growth. Expectations regarding interest rates can play a significant role in the economy. Often companies and individuals will make investment and purchasing decisions based on their interest rate expectations, extrapolated from recent events. If the central bank’s interest rate move is widely expected to be followed by other interest rate increases, investors and companies will act accordingly. Consumption, borrowing, and asset prices may all decline as a result of the revision in expectations.