Fiscal and monetary policy in Keynesian and Austrian economic theory

Macro-Economics

Macro Economics

There are numerous issues that governments must refer to when developing the strategy that the budget must be based on. Such issues are represented by fiscal and monetary policies. Fiscal policy is represented by the strategy developed by the government regarding the expenditure and revenue collection that are intended to be used as instruments of economic influence by the state. The most important objectives of the fiscal policy is to determine a situation of economic stability that can be reached by the control of interest rates and spending of the government. These objectives can be reached by fiscal policy instruments like government expenditures and taxation.

The government can influence the country's economic situation by modifying the level and composition of taxation and expenditures. There are numerous effects determined by this strategy (Rittenberg & Tregarthen, 2012). The most important effects on the economic situation can be represented by modification of the demand, resource allocation, the distribution of income, economic activity, government budget, and others.

Monetary policy is represented by the strategy developed by monetary activities in order to control the supply of money in the country. The objective of the monetary policy is to determine a stable and developing economic situation. This objective is reached by influencing interest rates. The monetary policy is used in order to determine stable prices, and reduced unemployment. Monetary policies can be expansionary or contractionary.

Expansionary policies are developed in situations characterized by recession when countries try to reduce unemployment. In such cases, governments must reduce interest rates in order to make it easier to get credits, which is intended to help companies expand their business, and to help individuals purchase more products and services. Contractionary policies are developed in situations where governments are trying to reduce inflation.

2. Some of the most important specialists in the field are John Maynard Keynes and Friedrich Hayek. Keynes and the specialists that support his theories consider that the government should focus on the fiscal policy in its attempt to influence economic stability (Weil, 2008). In the Keynesian opinion, fiscal policies can be used in order to counteract the effects of economic recessions and depressions. In addition to this, the Keynesian theory recommends that the level of economic activity is determined by aggregate demand. In his opinion, inadequate aggregate demand is likely to determine high levels of unemployment. It seems that the Keynesian theory was favored by capitalist governments. The importance of the Keynesian theory is also revealed by the economic crisis.

However, the theory developed by Hayek is opposed to the theory developed by Keynes. The theory developed by Hayek states that GDP growth is significantly influenced by the efficient allocation of capital. In addition to this, the theory also refers to the fact that interest rates can be influenced by monetary authorities. In Hayek's opinion should be established based on the relationship between consumption of goods and capital stocks. This allows making strategies that must focus on the consumption of goods.

It is obvious that the theories developed by Keynes and Hayek present different views on the strategies that government must develop. However, it is not recommended to think that these theories are incorrect. They must be analyzed in different contexts. These theories can be appropriate in the case of certain countries with certain levels of economic developments, but they can be inappropriate in the cases of other countries. It is important to determine how these theories can be applied in the case of each country.

3. The Federal Reserve focuses on the operations of the Federal Open Market Committee in order to influence the money supply and interest rates. These operations are represented by purchases and sales of U.S. Treasury and federal agency securities that are used in implementing the monetary policy. The objective of these operations is represented by reaching certain quantities of reserves or certain levels of prices. The Federal funds rate is the interest rate established by the Federal Reserve in situations where depositary institutions lend balances to other institutions (Federal Reserve, 2012). This instrument is used by the Federal Reserve in order to improve the stability of prices and the sustainability of economic growth.

There are also other instruments used by the Federal Reserve in its attempt to influence the money supply. Such an instrument is represented by reserve requirements. These reserve requirements are the amount of funds that must be held by depositary institutions in comparison with deposit liabilities. Federal Reserve Banks establish the reserve ratios determined by the Federal Reserve. The most important objective of strategies based on reserve requirements is represented by increasing the control of the Federal Reserve on the country's money supply.

The discount rate is another instrument used by the Federal Reserve that is intended to establish the interest rate of loans received by commercial banks from different Federal Reserve Banks. This strategy allows the Federal Reserve to influence interest rates that these banks used in their products and services provided to their customers.

4. a) This is neither fiscal or monetary policy. It refers to the health situation of certain categories of the population, but it does not involve modifications in the level or taxes and money supply. If this strategy leads to increased resource allocation towards reducing childhood obesity, it can be considered fiscal policy.

b) This is a fiscal policy instrument because it refers to budget expenditures, and resource allocation. The modification of the budget of different authorities represents a fiscal strategy.

c) This is neither fiscal or monetary policy. The requirements have important effects on the country's automobiles market but they are not determined by modifications of taxes and money supply.

d) This is fiscal policy. This is because agriculture subsidies provided by the federal government represent budget expenditures. This is a resource allocation issue that is determined by fiscal policy.

e) This is also a fiscal policy instrument. The objective of this plan is to increase employment, which is characteristic to monetary policies. However, the strategy used in order to reach this objective is fiscal.

f) This measure refers to national security and public health. Therefore, this is neither fiscal or monetary strategy. The fact that is determines modification in budget allocation does not mean that its objective is fiscal.

g) This is a fiscal policy measure because it refers to taxes. The tax deductions discussed by this strategy refer to the collection of taxes, which makes this a fiscal policy.

h) This is a monetary policy. This is because it refers to the interest rate which is included in the monetary strategy of the Federal Reserve.

i) This is another monetary policy issue because it refers to interest rates and their modification, which is characteristic to the monetary policy.

j) This is a monetary strategy. In addition to this, it refers to operations of the Federal Open Market Committee that are important instruments of the Federal Reserve.

k) This can be considered a fiscal policy because it refers to taxes. This is characteristic to fiscal policies.

Reference list:

1. Rittenberg, L. & Tregarthen, T. (2012). Principles of Macroeconomics. Retrieved May 18, 2012 from http://catalog.flatworldknowledge.com/bookhub/reader/2728?e=rittenmacro-ch12.

2. Federal Open Market Committee (2012). Federal Reserve. Retrieved May 23, 2012 from http://www.federalreserve.gov/monetarypolicy/fomc.htm.

3. Weil, D. (2008). Fiscal Policy. The Concise Encyclopedia of Economics. Retrieved May 23, 2012 from http://www.econlib.org/library/Enc/FiscalPolicy.html.

McDonald's and Macroeconomics

Company Presentation

McDonald's Corporation is one of the most famous brands and the world's largest chain of fast food restaurants. The company was established in 1940 and has been expanded to 119 countries. There are certain interesting facts about McDonald's that make this company a good example that can be analyzed in this macroeconomics class. This is because McDonald's restaurants can be developed and managed by franchisees, affiliates, or by the corporation. This means that there are numerous financial strategies used by the company in accordance with the type of ownership of each restaurant.

The most important items in the company's menu include hamburgers, cheeseburgers, chicken, French fries, soft drinks, shakes, and desserts. The company's success can also be attributed to the fact that its managers understand customers' needs and preferences and are interested in adapting the company's products to these preferences. Therefore, the company also provides salads, wraps, smoothies, and others.

It is important to understand the different sources of revenues that McDonald's benefits from. The company's revenues are determined by rent, royalties, fees that the company's franchisees must pay, sales, and others (Annual Report, 2011). It seems that the company is not significantly influenced by the crisis. This is because its revenues have increased by 27%, reaching $22.8 billion. Its operating income increased by 9%, reaching $3.9 billion.

Big Ideas and McDonald's

Some of the most important issues in macroeconomics that companies must take into consideration refer to business cycles and how they are influenced by the economy of the country and by the fiscal and monetary policies developed by the government. In accordance with this idea, each economic sector and company have expansion, recession, and peak periods. In other words, these companies expand their business, reach a peak in their business activity, and then go through a period of recession, followed by a period of business expansion, and so on.

It is important that companies understand that the economic sector they represent follows the same business cycle. Therefore, it is difficult for companies to expand their business during periods of recession in the economic sector they represent. But they can expand their business during recession periods of other business sectors, represented by products from indirect competition. This situation can be observed in McDonald's situation.

This can be an explanation of the fact that the company's sales have significantly increased during the crisis. The incomes of most people have been reduced, which means that their purchasing behavior has modified. In such cases, people usually spend less. This means that they purchase less, or they purchase cheaper products. In the case of the restaurants industry, it is obvious that these people cannot afford to eat out in traditional restaurants as much as they used to before the crisis. McDonald's provides a cheaper way of eating out. The smaller prices of the fast food chain in comparison with traditional restaurants have attracted the customers that cannot afford to eat in such restaurants. This situation has determined the sales of McDonald's to increase.

Another idea refers to employment and its influence on the fiscal and monetary policies. Some of the government's strategies are oriented towards reducing unemployment. The level of unemployment determines the government to focus on measures that stimulate jobs development. Such measures refer to modifying interest rates in order to control the money supply and to increase employment levels. The level of taxes can also be influenced by these measures. This is an important issue that affects the activity of McDonald's. If taxes increase, the company's profits are likely to reduce.

Financial Evaluation

The analysis of the financial situation of McDonald's reveals the fact that this is a profitable company. The company's revenues have increased by 27%, reaching $22.8 billion. Its operating income increased by 9%, reaching $3.9 billion. This reflects the fact that McDonald's is characterized by a strong financial situation that allows the company to expand its business.

Other indicators that can reveal the financial situation of the company is represented by its recruitment and selection process. In other words, if companies are hiring employees it means that they are developing, they are expanding their business, and their increased incomes allow them to hire people. If companies are reducing their number of employees, this situation reflects the fact that incomes are reduced and the company in case is not able to pay the salaries of their employees.

In the case of McDonald's it is difficult to make evaluations based on this indicator. This is because the different types of ownership do not allow to develop a correct idea of its human resources situation. The situation of McDonald's franchisees and affiliates does not reflect the situation of the corporation owned restaurants. It is important to establish the evolution of the human resources in the restaurants owned by the company, and not in those owned by its partners.

Reference list:

1. Annual Report (2011). McDonald's. Retrieved May 23, 2012 from http://www.aboutmcdonalds.com/mcd/investors/annual_reports.html.

Macroeconomic Indicators

1. GDP

Consumer spending = $1,000

Government expenditures = $300

Investments by industry = $150

Excess of exports over imports = $200

GDP formula:

GDP = consumer spending + government expenditures + investments by industry + excess of exports over imports

In this case, the GDP = $1,000 + $300 + $150 + $200

GDP = $1,650

2. If the domestic energy production is increased, this leads to reduced oil imports from other countries. In this case, the excess of exports over imports increases, which means the GDP increases with this number.

Inflation

1. CPI1 = 100

CPI2 = 104

Rate of inflation formula:

Rate of inflation = ((CPI2-CPI1)/CPI1)*100

In this case, the rate of inflation is:

Rate of inflation = ((104-100)/100)*100

Rate of inflation = 4%

2. CPI1 = 231

CPI2 = 234

Rate of inflation = ((234-231)/231)*100

Rate of inflation = 1.2% or 0.012

Unemployment rate

1. Total workforce = 20,000

Unemployed people = 2,000

Unemployment rate = (number of unemployed people / number of people in the civilian workforce)/*100

In this case, unemployment rate = (2,000/20,000)*100

Unemployment rate = 10%

2. Total workforce = 20,000

Unemployed people = 2,000, of which 500 are not looking for work. Unemployed people must be looking for work in order to be considered unemployed. In this case:

Unemployed people = 2,000 -- 500 = 1,500

Unemployment rate = (number of unemployed people / number of people in the civilian workforce)/*100

In this case, unemployment rate = (1,500/20,000)*100

Unemployment rate = 7.5%

International Economic Trends

1. Output and Growth real GDP

In 2008, the UK had the highest increase in the real GDP, followed by Canada, the U.S., and Japan. The crisis has affected these countries that reported significant changes in their GDP. In other words, their GDP has reduced in 2009 in comparison with 2008. Therefore, in 2009 the highest GDP reduction was reported by Japan, followed by the UK, the U.S., and Canada. The most important changes between 2009 and 2008 were reported by Japan and the UK. The smallest change was reported by Canada. In 2010, Japan had the highest GDP increase, followed by Canada, the U.S., and the UK. In other words, Japan had the most important recovery from the crisis. In 2011, Japan has reported the most important reduction of GDP. The highest GDP increase was reported by Canada, followed by the U.S., and the UK.

2. Inflation and prices

In 2008, the highest increase in the consumer price index was reported by the U.S., followed by the UK, Canada, and Japan. In 2009, the CPI has significantly reduced in the case of these countries (Economic Research, 2012). The most important reduction can be observed in the case of Japan. The smallest CPI reduction was reported by the UK. Canada and the U.S. have reported CPI reductions similar to that of Japan. In 2010, the situation improved a little in the case of these countries, because they were able to increase their CPI. However, their progress was significantly influenced by their CPI in 2009. Therefore, in 2010 Japan reported the highest CPI increase. The UK reported the highest CPI increase. Canada and the U.S. have reported CPI increases slightly smaller than that of the UK.

3. Labor markets

In 2008, Canada was the country with the highest employment rate. Japan had the smallest employment rate. The U.S. And the UK has a slightly higher employment rate in comparison with that of Japan. It seems that the employment rate of these countries was affected in 2009 by the crisis. In this case, the U.S. had the most important employment rate reduction, followed by the UK, Canada, and Japan. The situation has improved in 2010. The highest increase in the employment rate was reported by Canada. The U.S. And Japan have reported smaller employment rate increases. The UK reported the smallest employment rate increase. In 2011, the employment rate in Japan has significantly reduced, but the employment rate in Canada, the U.S., and the UK were not significantly affected.

Treasury bonds

1. The differences in rates among these bonds are determined by maturity risk premiums and liquidity risk premiums. The risks associated with treasury bonds increase in accordance with the time they must refer to. In other words, it is difficult to determine the liquidity of the country in longer periods of time.

2. The false statement is:

a) the default risk premium is applied to all bonds including U.S. Government ones.

This is because the U.S. Government does not pay such default premiums.

3. The inflation premium that should be required by investors is:

Inflation premium = nominal rate -- real rate + risk premium

In this case, the inflation premium = nominal rate -- 4%

4. In case the inflation rate is 0%, the yield curve is likely to have a constant slope because of the constant level of inflation.

Reference list:

1. International Economic Trends (2012). Economic Research. Retrieved May 24, 2012 from http://research.stlouisfed.org/publications/iet/.

McDonald's and Macroeconomic Indicators

1. The selected company is McDonald's and it provides fast food products in a large chain of restaurants. In order to understand how these macroeconomic indicators affect the performance of the company, it is important to take into consideration the fact that the indicators in the U.S. must be analyzed with the indicators of some of the most important countries that McDonald's has opened restaurants in.

The indicators used in this analysis are represented by GDP, CPI, and unemployment rates. These are some of the most important indicators that can provide a correct idea of the national economy of different countries, and that can have significant effects on the activity of companies in these countries. In other words, such indicators and their evolution can significantly influence the strategy developed by these companies.

In the case of McDonald's, the crisis that has affected the countries in which the company develops its activity also influenced the performance of the company. It seems that McDonald's was favored by some of the changes in these macroeconomic indicators. The real GDP has been reduced as a result of the crisis. This has important effects on the population's incomes, which have also been reduced. This means that the customers targeted by McDonald's are likely to purchase less. This leads to reduced profits for McDonald's. But the crisis has also reduced the incomes of people that normally went out to eat at traditional restaurants. Their reduced incomes do not allow some of them to go to traditional restaurants, so they prefer to go to cheaper fast food chains like McDonald's. Therefore, this leads to increased profits of the company.

The consumer price index is another macroeconomic indicator that has an important influence on the activity of McDonald's. The CPI reveals the evolution of prices in the U.S. economy. Same as in the case of the GDP, the CPI has been affected by the crisis. Therefore, prices have increased, with important effects on consumers, companies, and the country's economy. The evolution of the CPI reveals the fact that during the crisis the purchasing power of most customers has been reduced. This means that they purchase less, or that they purchase cheaper products. Regarding companies, this means reduced sales, smaller profits, and reduced opportunities of development.

The unemployment rate is another important indicator that companies like McDonald's must take into consideration. The evolution of the country's workforce also influences the strategy developed by companies in their attempt to attract candidates for their jobs. This seems to favor some of these companies. Higher unemployment rate means that more people are looking for jobs. This leads to increased competition in the recruitment and selection process.

This situation allows companies to increase the standards of their jobs. They can offer smaller salaries because people are forced by this situation to accept working conditions that they normally would not accept. This situation in the workforce determines employees to improve their performance with minimum motivation from these companies. Therefore, companies can reduce the costs of their human resources. This allows them to make investments in other activities that require resource allocation.

2. The Federal Reserve has the ability to significantly influence the activity of companies in the U.S. The most important objective of the Federal Reserve is to control the money supply in the market in order to provide stability and sustainable development (Federal Reserve Bank of New York, 2012). Other objectives of the Federal Reserve refer to reducing prices, reducing unemployment, and stimulating the activity of companies. In order to reach these objectives, the Federal Reserve usually modifies the level of interest rates.

If the Federal Reserve decides to increase the interest rates, McDonald's and its activity can be significantly affected. This is because the prices they pay to their suppliers are likely to increase. The prices of raw materials used in producing the food would increase, determining the company to increase prices or to invest in other strategies intended to increase sales. In other words, the company's sales would significantly reduce.

If the Federal Reserve increases interest rates, the profitability of McDonald's can be affected. In the case of reduced sales, the profits of the company are also reduced. This forces McDonald's to reduce its production costs or to increase its prices. In such situations, it is not likely that production costs can be reduced. The outsourcing process is one of the most important strategies that companies can use in order to reduce their production costs. But in the food industry it is difficult to outsource the production of the food produced by the company. Therefore, in case the Federal Reserve increases interest rate and its sales reduce, the company is determined to increase the prices of its products. This can also lead to reduced sales. Therefore, the Federal; Reserve's strategy of increasing interests rates is not favorable in the case of McDonald's. The company's partners are also affected by the same problems. This means that they must increase the prices of the products McDonald's purchases from them. This leads to increased costs for McDonald's production, determining the company to increase the prices of their products.

Reference list:

1. The Yield Curve as a Leading Indicator (2012). Federal Reserve Bank of New York. Retrieved May 24, 2012 from http://www.newyorkfed.org/research/capital_markets/ycfaq.html.

McDonald's and the Federal Budget

1. Companies are affected by the budget proposals and strategies developed by the government. But companies also have the ability to influence the government in modifying this strategy by developing an important lobby activity. McDonald's is an important company with important effects on the economy and on the budget. Therefore, it is likely that the budget strategies lobbied by the company can influence the decisions of the government regarding the budget.

There are certain issues that can be addressed by the government in order to help McDonald's. The objective of the company is to reduce its costs and to increase its incomes. This objective can be reached with the help of the government and the measures it addresses regarding its fiscal strategy. Therefore, in order to help the activity of McDonald's, the government can reduce the taxes applied to companies. This refers to the number of taxes, but also to their level. Most companies do not agree with the taxes collected by the government. In their opinion, these taxes are too high in comparison with the economic conditions in the country.

Therefore, the activity of McDonald's can be significantly influenced by reducing these taxes. The reduction of taxes helps the company increase its incomes. This leads to increased investments in certain activities. If the company's incomes increase, McDonald's has the possibility of investing in the development of its business. This means the company can create an important number of jobs. This helps reduce the unemployment rate, which is important in reducing the budget deficit.

Certain specialists in the field consider that the government should increase taxes in order to reduce the budget deficit. But these specialists do not seem to understand the implications of this measure. They are not able to find other solutions for increasing tax collection than by increasing taxes. Therefore, it is important that the government understands the fact that reducing the taxes applied to companies can lead to an increased level of tax collection.

Another important issue that McDonald's should lobby for is represented by reducing the payroll taxes. The taxes applied to salaries of employee are high and difficult to be paid by companies and by employees. The high level of social security taxes determines companies to reduce the jobs they create because they cannot afford to pay these taxes. As a result, they prefer to engage in tax evasion activities. This leads to reduce collection levels of the government and increased budget deficit. It is recommended that the government reduces the social security taxes. By reducing these taxes, McDonald's can hire an increased number of employees. This helps reduce the unemployment rate. This also leads to increased production and increased sales. If the company's incomes increase, the company can reduce its process. This determines increased consumption.

The lobby activity that can help influence the government and its strategy in helping McDonald's improve its activity also refers to determining the government to provide a certain incentives intended to help companies expand their business. Same as in the case of McDonald's, numerous companies agree that such incentives are necessary. There should be different types of incentives. Most of these incentives refer to stimulating companies to create jobs. In certain cases, companies receive incentives for hiring students or for hiring unemployed or disabled persons. However, these incentives are not sufficient in creating jobs. It is recommended that the government provides an increased level of incentives in the case of McDonald's and other companies that are interested in creating jobs.

2. The lobby activity is criticized by certain specialists in the field, and defended by others. In my opinion the criticism regarding the lobby activity can be attributed to the fact that in numerous cases companies have developed lobby activities that were unethical. Therefore, people often associate the lobby activity with the lack of ethics. In their opinion, the lobby activity refers to protecting the interest of large companies, while the interests of individuals are not protected.

It is important to understand the objectives of the lobby activity and the fact that it should be an ethical issue. In my opinion, the lobby activity is useful. In addition to this, companies should increase their efforts in investing in lobby activities regarding their interests (Chiff, 2012). People must understand the fact that if these companies reach their objectives, this can have important benefits to the national economy and to individuals. The lobby activity is intended to help companies reach objectives like increasing their profitability. If they increase their profitability, these companies can reduce their production costs, which allow them to reduce their prices. This is an important benefit for individuals that can increase their consumption. This increased consumption means increased taxable income that the government benefits from.

Therefore, people should understand that the success of these companies helps improve the national economic situation. As a result, their individual situation is improved, because the government is able to make investments in issues of great interest to individuals. However, there are also certain issues about the lobby activity that must be improved. Such issues refer to the ethics of companies that lobby to the government. It is important that lobbyists use ethics in order to help companies improve their performance.

Reference list:

1. Lobbying (2012). Retrieved May 27, 2012 from http://www.chiff.com/society/lobby.htm.

Macroeconomics Integration and Reflection

The Macroeconomics course is one of the most important courses in this program. In my opinion, the issues presented in these classes are of great importance to students, but to all individuals. This is because macroeconomics issues help us understand how the government works, how the budget is formed, how the budget is used, how it influences the economy, and how it influences individual issues. My knowledge in this field has significantly improved as a result of taking this course.

The most important benefits that I can identify in this case refer to understanding how the fiscal and monetary policies are developed. This helps understand how the economic activity is influenced by the government. The importance of this issue relies on the fact that the economic activity influences the consumption of individuals and the activity of companies. Therefore, it is important to understand how the federal budget is developed and what its objectives are. This helps companies develop their activity in accordance with the strategies of the federal government.

Regarding the work I did in the session for the class, my opinion is that I did a good job. In addition to this, I think my work reflects the fact that I understand the issues discussed in this class and that I am able to apply them on the activity of companies. I also think that my work in the class reveals the fact I understand how the principles of macroeconomics can be applied on individual level.

This is important because these issues are useful in the professional activity. Companies are interested in employees that understand these principles and how they affect the activity of the company. Therefore, I think that my work helps me understand these principles. However, the work I did in class can be improved. In my case, the work can be improved if I worked in the company I used in these work assignments. This is because it could help me better understand the effects of macroeconomics on the company.

I was able to understand most of the topics discussed in the course. I think the easiest topics are represented by aggregate demand and supply. This is because I also had strong knowledge of them from the micro economics class. The most difficult to understand were the topics regarding the treasury bonds. In this case, I find it difficult to understand the risks associated with these bonds and how they are calculated. This is also because I do not use such bonds and I am not that interested in them. In my opinion, they do not present great interest. This made it difficult for me to motivate into learning about them and understanding their characteristics.

In order to make these topics easier to understand, I think that professors should provide examples of how these bonds can be used by individuals. Their effects must also be addressed. This is because it is easier to understand such issues on individual level.

The effects of what I have learned in this course can be measured by the results in other classes that refer to topics that require macroeconomic knowledge. The progress and improvement can also be measure by my professional activity and my performance at work. I intend to use the things I learned in this class in my job. Therefore, this knowledge should be reflected in the results of my professional activity.

In addition to this, this progress can be reflected by my performance in other education programs. I intend to improve my knowledge in this field because I want to put this important knowledge to use in an important company. It is important to focus on improving my knowledge because this helps me increase my productivity.