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.