The effect of Fiscal Policy Assignment Solution

Introduction To Business
Environment

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Monetary Policy and Their Impact On Business....................................................................1
Fiscal Policy and Their Impact On Business..........................................................................2
Global Factors and Their Impact On Business.......................................................................5
Region Factors And Their Impact On Business.....................................................................7
CONCLUSION................................................................................................................................9

INTRODUCTION
Business environment is a study of all internal and external factors which can affect or
influence the business. This report explains, how the different policies of government can affect
the performance of a business. This report explains about monetary policy of a nation which can
affect the business of an organization by controlling the interest rates of short term loans and
money flow in the market. The effect of Fiscal policy on the business of an organization is
explained. This report also gives a brief about the global and regional factor and their impact on
the business activities of an organization.
MAIN BODY
Monetary Policy and Their Impact On Business
Monetary Policy is a policy which is prepared and implement by central bank with the
consultation of central government. Purpose behind this policy is to control monetary movement
in the economy which is arisen due to some situations like Inflation, consumption, growth and
liquidity.
There are two types of monetary policy -
1. EXPANSIONARY MONETARY POLICY – In this policy, central bank increases the
money supply, lowers interest rates, and increases aggregate demand in order to
encouraging economic growth.
2. CONTRACTION MONETARY POLICY – In this policy, central bank decreases the
money supply, increases interest rates and decreases aggregate demand in order to reduce
the inflation.
Impact of Monetary Policy on the Business Activities of organization within UK -
UK government and central bank uses monetary policy for the purpose of control the
level of inflation by using interest rate. Impact of monetary policy can be describing by
following points -
1. Impact of Monetary Policy On Interest Rates – Commercial banks have to deposit some
money to central banks at 2 rates - SLR (Statutory Liquid Rate) and CRR (Cash Reserve
Ratio). When there is inflation in the country, Central bank increases these rates. This
will lead commercial bank to increase its bank rate. Increase in bank rate decreases the
borrowing capacity of public. When there is deflation in the economy, Central bank
decreases its CRR and SLR which lead to decrease in the bank loan of commercial bank.

2. Impact of Monetary Policy On Investment – When central bank increases its SLR and
CRR, this lead commercial banks to increase its bank rates. This will make borrowing
costlier and promote saving. This will lead to low investments. On the flip side, when
central bank decreases its SLR and CRR, this lead commercial banks to decrease its bank
rates. This will make borrowing cheaper and de-promote saving. This will lead to more
investments.
3. Impact of Monetary Policy On Money Supply - Monetary policy affect the money supply
in an economy, which influences the interest rates and the inflation rate. It also influenced
the business expansion, imports-exports, employment rate, the cost of debt, and the
relative cost of consumption and saving. These all factors directly or indirectly impact
aggregate demand in nation.
Advantages of Monetary Policy -
Advantages of Monetary Policy are as follows -
1. Encourage higher levels of economic activity – Through monetary policy, central bank
can control the economic activities of the consumers according to the current scenario of
the nation. When there is economic growth happening in the nation, banks decrease its
interest rate in order to encourage lending capacity of the consumers. Decreasing in
interest rates lead to reduction in prices, which lead to increase in purchasing power of
customers.
2. Promotes transparency – It promotes transparency.
Disadvantages of Monetary Policy -
Disadvantages of Monetary Policy are as follows -
Fiscal Policy and Their Impact On Business
Fiscal Policy is a governmental tool to influenced the nation economy by its income (tax)
and expenditure. This policy is used as a sister policy of monetary policy to directs the nation's
economy. The purpose behind the fiscal policy is to create growth of the nation's economy.
There are two types of fiscal policy -
1. EXPANSIONARY FISCAL POLICY – In this policy, government decreases tax rate and
increase expenditure or do both simultaneously in order to provide more money to the
consumers and businesses.

2. CONTRACTION FISCAL POLICY – In this policy, government increases tax rate and
decrease expenditure or do both simultaneously in order to reduce the available money
for the businesses and consumers.
Impact of Fiscal Policy on the Business Activities of organization within UK -
UK government use Expansionary Fiscal Policy to reduce tax rates and increase
expenditures in order to provide money to the UK consumers and businesses. Impact of Fiscal
Policy are as follows -
1. Tax Policies – Change in Tax policy affect the business activities. UK government
implement lower tax rate on businesses. Low tax rate means more profits. More profits
mean more salary and wages paid to employees and workers. Low tax rate increases
more investments which lead to more job creation and wealth creation for business which
increases more investment activities in industries and businesses which increases their
profits, revenues and capacity and reduce the cost. This lead to development of
businesses and industries of UK. Low tax rate means more profits and revenues which
can be used in technology investment. This will bring some advance technology in
Illustration 1: Types of Fiscal Policy
Source: Fiscal Policy Types, Objectives, and Tools, 2019

business which is beneficial for the company. Also, more profits mean high chance of
expansion opportunities or new product development which is also beneficial for the
company. Low tax paid by businesses means more income which means high dividend to
shareholders. This can lead to increase their share prices which is beneficial for the
companies of UK.
2. Government Spending – UK government spending may affect the businesses directly or
indirectly. Government spending means expenses on the public welfare and business
welfare which can boost the economy. When, there is increase in government spending
this lead to increase in tax rate which means purchasing power of customers decreases.
This will lead to low sale of goods and services produced by company. This impact the
profitability of companies and industries of UK. During the financial crisis, increasing in
government spending plays an important role in the development of businesses so that
businesses cannot immerse. Government spending means focusing on infrastructure of
UK which create employment of people which means they will get incomes. By these
incomes, they will get foods, goods and services which increases the sale and profitability
of companies and industries which give them national and international recognition.
3. Unemployment – Unemployment also impact the business activities. High unemployment
rate weakens the purchasing power of consumers which reduces the sales of goods and
services provide by business. This lead to reduction in profitability of company. High
unemployment give businesses a chance to employ suitable employees for the
organization. High unemployment rate gives chance for the exploration of
entrepreneurship which create high competition for the businesses. Unemployment rate
also put burden on the companies for the Unemployment Insurance Rate, which also lead
to decrease in profitability and increase in the expenditure of the company. Increasing in
unemployment rate also impact the rate of employee turnover which is reducing because
employees do not leave their jobs due to fear of not getting new job.
Advantages of Fiscal Policy -
Advantages of Fiscal Policy are as follows -
1. Reduction in Unemployment – When there is increasing in the rate of unemployment in
the nation, this lead to decrease in tax rate and increase in government spending. Cutting
tax rate means increase in disposable income which enhances the demand for goods and

services. Thus increasing demand will lead to increase in production capacity. For this,
company have to employ new employees. This can lead to decrease in unemployment
rate.
2. Boost Economic Growth – When government cuts the rate of taxation, this will lead to
increase in disposable income of businesses and consumers. For the purpose of wealth
creation, both parties (businesses and consumers) spend their extra saving into investment
which lead to creation of capital in the economy which increases the national income,
employments, returns on investment and high GDP rate which boost the growth of
economy.
Disadvantages of Fiscal Policy -
Disadvantages of Fiscal Policy are as follows
1. Budget Deficits – When government increase its spending and decreases its revenue by
cutting tax rates. This lead to imbalance between income and expenses which creates
deficit impact on the economy and create financial crisis for the country.
Global Factors and Their Impact On Business
1. INTERNATIONAL MONETARY FUND – It is an international organization whose
main objective is to boost the economic growth of all the member nation of the world.
Objectives of IMF are as follows -
 To promote international businesses.
 To decrease the unemployment rate of member’s countries.
 To stabilised the economic conditions of members’ countries.
Impact of IMF on business - Businesses want to work in stable and predictable environment.
IMF provides them this kind of environment where risk is less. Like this, IMF impacts the
profitability and operations of the businesses of UK. It provides loans to the UK government
which help the businesses to survive during financial crisis.
2. INTERNATIONAL TRADE AGREEMENTS – It is an agreement between two or more
nations for the purpose of trading with each other’s. The trade agreement can be related
to the taxation or particular goods and services or investments or tariffs etc.
Impact of International Trade Agreements on business – If governments of two nations agree to
imposition of import tariffs, quotas on imports and exports of certain goods, and subsidies for
local producers. This will lead in earning profits for those business whose activities is to do

imports and exports. Also, they don't need to fear from the cut-throat competition in the global
level.
3. INTERNATIONAL FINANCIAL DEVELOPMENT – It is an international institution
that provides the funds to the nation for the purpose of investments and loans and gives
advisory services regarding development of economic conditions.
Impact of International Financial Development on business – It provides businesses long term
loans for 7 to 12 years which helps the business to achieve its objectives and compete the
competitors at the global level and gain competitive advantages. It also gives businesses wide
range of financial advisories which helps the business to improve its strategies, operations and
management. This will lead organizations to operates its businesses with efficiently and
effectively.
4. INTERNATIONAL CAPITAL MOVEMENTS – It refers to the lending and borrowing
funds between two or more nations. These capital movements are recorded in the capital
account of the Balance of Payments (BOPs) of the nations.
Impact of International Capital Movements on business – International capital movements
directly impact those businesses who are involved in export and import of goods and services.
Capital movements are generally happening between a country where interest rates are low and a
country where interest rates are high. So, business of that nation where interest rate is high can
take benefits of investments, resources and human factors at cheap rate which influence the
company's cost and profitability.
5. ECONOMIC GLOBALIZATION – It refers to the interaction of various economies of
nations for the purpose of cross countries trade. It involves the movements of goods,
capital, services, technology and information between various nations.
Impact of Economic Globalization on business – It creates cut-throat competition for companies
at global level. It helps the business to acquire economies of scale which help the business to
gain competitive advantages and improves its productivity. It helps companies to do
mergers/acquisitions/takeovers with another companies which boost the market shares of
companies and gives opportunities to expand its business activities to anywhere in all over the
world.
6. FOREIGN EXCHANGE – It is a market where different currencies are traded between
various countries. It determines the exchange rates of various currencies.

Impact of Foreign Exchange on business – It influences the export and import prices which
directly impact the profitability of companies. If a currency depreciates against another currency,
it is beneficial for exporters and negatively impacts importers and vice versa. Continuous
changing in exchange rate impact the financial forecasting techniques which make businesses
change their plans regarding investments, sales and profits.
7. BALANCE OF PAYMENTS – Balance of Payment (BOP) is a statement where all the
economic transactions of particular period of time are recorded. It is a summary of
monetary transactions which occur between two countries.
Impact of BOP on business -
Region Factors And Their Impact On Business
The business excellency and operational efficiency of the business greatly depends upon
the regional parameters. The success of business mainly depends upon the factors such as human
resources and other vital assets which are required to perform the functional activities of the
business. There have been several factors and development trends which are changing the current
business scenario in UK. Some of the most important regional aspects are as follows:
Skilled labours:
The education level and availability of the skilled and unskilled labours can be a great
challenge for the business companies. Different regions of UK have different social structures. It
can be hard for the companies to ensure the availability of suitable labours for the company. For
instance many manufacturing organisations are situated in the region where workforce is easily
available at low cost. Thus, the operational cost is reduced and workforce can be easily
accessible. However contrary to this there are regions which are highly developed and in such
regions the availability of workforce at low cost is not possible. Thus, before entering into any
business activity companies always assure that they can easily get the human resources so that
their work is managed.
Cultural factors:
Another significant factor which influences the business process is the cultural and social
aspect. This factor not only influences the operational aspects of business but also defines the
nature of target customers. In order to sustain the successful position in competitive market it is
vital for the business to recognise the cultural differences. For example it is possible that the

products or services of a particular business are not acceptable in specific UK region. In such
cases there are minimum possibility that the business services will be acceptable the customers.
Thus, for achieving the success in business it is important for the organisations that they must
evaluate the cultural factors prior to their business plan. Another example in which culture can
affect the business is marketing. It has been observed that when companies promote their
services as per the regional trends then their business gets more positive and quick response from
people which is beneficial for the business.
Resource availability:
One of the most critical aspect which influences the business is easy and on time resource
availability. Some regions may facilitate the easy supply and availability of the raw materials
required for the business while other may face challenges. The regions in which business
resources are easily available tend to produce more efficient outputs. This aspect also depends
upon the regional development. For example the UK regions such as London, England which are
highly developed provides highly competitive market but also assures that business functions are
executed with the optimum and most beneficial strategies. The developed regions provide more
growth opportunity to business as such regions are well occupied with the advanced technology
and other business resources.
Regional supply chains:
The supply chain system is the activity of moving a product or a service from production
house to the consumer. To set up a business in new market the supply chain is the most integral
and important part. The sales and services of the business is depends on the performance of the
supply chain. It is important to supply the product with in the time for better customer reviews.
To established new business in the market there is a need of the supply chain to provide the
goods and services of the company to the local market efficiently. For the new business it is so
important to arrange the supply chain because without the supply chain the product will remain
in the company and affect the business profit. The marketing and supply of the product is
depended on the supply chain. Retailers are also depended on them for the product. The supply
chain of the company is responsible to deliver the quality product to the customer at the best and
suitable price.
Regional market and business trends:

Regional market means the targeted market for the company product. To establish a
business at market the company need to know the market possibilities and decide the strategy to
sell the product. The opportunities and problems of the regional market have major impact on
the business. The local demand of the product allow the company to produce accordingly to
generate the profit. The market status, population and culture of the area also affect the business.
The political factor of the region can also affect the business of the company by deciding the
rules and regulation for the business. The economical condition of the area also affect the
business by allowing the company to introduce new product in the market. The market trends can
affect the business, the availability of the raw material influences the production cost of the
company. If the resources are available in the region will reduce the cost of production and if the
resources are limited, it will increase the cost of production for the company. The availability of
the employees and labour in area, improves the opportunities for the organisations. The regional
trends help the organisations to decide the strategy for the marketing.
CONCLUSION
This report studies the different factors that affects the business of an organisation. This
report gives the information about the policies which are used to control the money flow and
the interest rate of short term loan and their effect on the business of an organisation and
advantages and disadvantages of the monetary policy. Further the report is explaining the
effect of the tools used by the government to control or influence the economy of country by
income tax. The advantages and disadvantage of the fiscal policy. The effect of the global
factor on the business of an organisation are explained in the study. The effect of the
regional supply chain and regional trends on the business is also explained in the report.

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Online
The Five Elements of the Business Environment.2018[Online] Available
Through<https://bizfluent.com/info-10070542-five-elements-business-
environment.html>
Political Factors Affect Business Environment.2019[Online] Available
Through<https://www.marketingtutor.net/political-factors-affect-business/>

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