General Economic InfluencesMonetary

General Economic Influences
Monetary and fiscal policy measures enacted by various agencies of national governments
influence the aggregate economies of those countries. The resulting economic conditions
influence all industries and companies within the economies.
Fiscal policy initiatives, such as tax credits or tax cuts, can encourage spending, whereas additional
taxes on income, gasoline, cigarettes, and liquor can discourage spending. Increases or
decreases in government spending on defense, on unemployment insurance, retraining programs,
or on highways also influence the general economy. These fiscal policies influence the
business environment for firms that rely directly on such government expenditures. In addition,
we know that government spending has a strong multiplier effect. For example, increases
in road building increase the demand for earth-moving equipment and concrete materials. As
a result, in addition to construction workers, the employees of industries that supply the
equipment and materials have more to spend on consumer goods, which raises the demand
for consumer goods, which, in turn, affects another set of suppliers.
Monetary policy produces similar economic changes. A restrictive monetary policy that reduces
the growth rate of the money supply reduces the supply of funds for working capital and
expansion for all businesses. Alternatively, a restrictive monetary policy that targets interest
rates would raise market interest rates and therefore firms’ costs and make it more expensive
for individuals to finance home mortgages and to purchase other durable goods, such as autos and appliances. Monetary policy therefore affects all segments of an economy and that econo-
my’s relationship with other economies.
Any economic analysis requires the consideration of inflation. As discussed, inflation causes
differences between real and nominal interest rates and changes the spending, saving, and in-
vestment behaviors of consumers and corporations. In addition, unexpected changes in the
rate of inflation make it difficult for firms to plan, which inhibits growth and innovation. Be-
yond the impact on the domestic economy, differential inflation and interest rates also influ-
ence the trade balance between countries and the exchange rate for currencies.
In addition to monetary and fiscal policy actions, such events as war, political upheavals in
foreign countries, or international monetary devaluations produce changes in the business en-
vironment that add to the uncertainty of sales and earnings expectations and therefore the risk
premium required by investors. For example, the political uncertainty in Russia during the late
1990s caused a significant increase in the risk premium for investors in Russia and a reduction
in investment and spending in Russia. In contrast, the end of apartheid in South Africa and
the country’s open election in the mid-1990s were viewed as positive events and have led to a
significant increase in economic activity in the country. Similarly, the peace accord in North-
ern Ireland in the late 1990s caused a major influx of investment and tourist dollars. Finally,
the debt problems in Greece and several other European countries in 2010 and 2011 have
threatened the European Union and the value of the euro currency.
In short, it is difficult to conceive of any industry or company that can avoid the impact of
macroeconomic developments that affect the total economy. Because aggregate economic