Hi All,
Here is the forum to post your blog-post 2. Milestone 3 comprises of reading from Weeks 5 and 6 (Chapters 34-37)
Include these key requirements in your submission:
How does the policy of the Federal Reserve bank as well as the Central bank of its key market affect the company’s economic growth? Remember, if your home market is not the US, you would need to use their Central market and not Federal Reserve Bank.
Effect of fiscal policies of the home country and one key market on the company.
Paper length should be at least 5 pages (including cover and reference pages).
Use a minimum of 3 professional references (do not use Wikipedia, blogs, vlogs or any pedias)
Paper should be written in APA including Times New Roman, 12 font, double space, paragraphs indented, subheadings used.
Note that references provided must have corresponding in-text citations within the paper
Milestone #3
Timothy Venable
Regent University
ECON 230 - Macroeconomics
Dr. Jeff Bajah
April 24, 2022
Federal Reserve Bank Policies
Over the past three years, the United States monetary policy has been in response to the COVID-19 pandemic. “From June 2020 until November 2021, the Federal Reserve expanded its holdings of Treasury securities by $80 billion per month and its holdings of agency mortgage-backed securities by $40 billion per month” (Monetary Policy Report - February 2022, 2022, para. 10). The Federal Reserve purchased and repurchased more Treasury Bills during this time to stimulate the economy through higher money supplies and lower interest rates (Cowen & Tabarrok, 2020, p. 739). However, beginning in December of 2021, the Federal Reserve decided to reduce their number of monthly net asset purchases in response to inflation and the growing labor market (Monetary Policy Report - February 2022, 2022, para. 10). With this decrease in purchasing Treasury Bills, the Federal Reserve is trying to slow the economy through lower money supplies and higher interest rates (Cowen & Tabarrok, 2020, p. 739).
Impact on McDonald’s Profitability
Since “higher interest rates lead to substantially less borrowing” (Gross & Souleles, 2002, p. 22), there will be fewer people willing to get loans to open up McDonald’s franchises. Additionally, as a result of inflation, the costs of goods are increasing, which can affect the prices of McDonald’s products, as well as the number of employees they hire.
Bank of Japan’s Policies
“The Bank of Japan has adopted a negative interest rate policy to increase the total amount of money in circulation with the aim of eliminating deflation” (Kobayashi & Bremer, 2022, p. 1). “Deflation is a decrease in the average level of prices (a negative inflation rate)” (Cowen & Tabarrok, 2020, p. 670). This policy discourages saving money with the negative deposit rates and encourages borrowing, spending, and investing money (Hayes, 2021, para. 3).
Impact on McDonald’s Growth
This negative interest rate policy is particularly beneficial for the growth of McDonald’s. In Japan, this policy encourages potential franchise owners to take out loans to start franchises, as well as encourages Japanese customers to spend money on the menu items McDonald’s offers.
U.S. Fiscal Policies
“Fiscal policy is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations” (Cowen & Tabarrok, 2020, p. 805). As a result of the COVID-19 pandemic, the countries of the world experienced increased fiscal expansion (Ilori et al., 2022, p. 1). The fiscal expansion in the United States involved increased “output along with consumption and investment, in addition to a depreciation in the real exchange rate and in the terms of trade” (Ilori et al., 2022, p. 1). As a result of increased spending (i.e. the Federal Government passed out a number of stimulus checks during the pandemic), Americans increased their consumption of goods, as well as invested their money. However, due to the lockdown measures, many small businesses went out of business. With so much money in circulation, the U.S. dollar’s worth (real exchange rate) has depreciated. Additionally, the fiscal spending of the United States government has caused inflation.
Impact on McDonald’s Profitability
While fluctuations in the United States’ fiscal policy will affect McDonald’s, the effects of these policies will particularly harm small businesses in America, who do not have the money or name recognition that McDonald’s has. In 2020, McDonald’s outperformed its sector in sales, in spite of the stagnation it experienced from the COVID-19 pandemic (Hines, 2021, p. 32). And, “the company’s operating income…is expected to rise at an annualized rate of 6.1% to $8.9 billion over the five years to 2021, driven by economic recovery following the pandemic” (Hines, 2021, p. 32).
Japan’s Fiscal Policies
Due to increased levels of fiscal spending, many advanced countries have increased their public debt-to-GDP ratios (Sakuragawa & Sakuragawa, 2020, p. 1). “Among them, Japan has the highest debt-to-GDP ratio, and is one of the countries for which there is great concern about debt sustainability” (Sakuragawa & Sakuragawa, 2020, p. 1). As a country’s debt-to-GDP increases, its risk of default increases as well (Kenton, 2022, para. 6). Economic effects from sovereign default include going into a recession, the currency being devalued, and/or the country being locked out of debt markets for an extended period of time (Chen, 2022, para. 24).
Impact on McDonald’s Profitability
As was mentioned above, high levels of fiscal spending can ultimately lead to an economic recession, which would decrease the revenue and profits a company makes (The Investopedia Team, 2022, para. 10). For large companies like McDonald’s, they would have to cut back their hiring, refrain from rolling out new products, and reduce their marketing and advertising budgets (The Investopedia Team, 2022, para. 10).
References
Chen, J. (2022). Default. Retrieved from 19 April 2022, from https://www.investopedia.com/terms/d/default2.asp#toc-sovereign-default.
Cowen, T., & Tabarrok, A. (2020). Modern Principles of Economics (5th Edition). Macmillan Higher Education. https://mbsdirect.vitalsource.com/books/9781319329464.
Gross, D. B., & Souleles, N. S. (2002). Do liquidity constraints and interest rates matter for consumer behavior? Evidence from credit card data. The Quarterly journal of economics, 117(1), 149-185.
Hayes, A. (2021). Negative Interest Rate Policy (NIRP) Definition. Retrieved 19 April 2022, from https://www.investopedia.com/terms/n/negative-interest-rate-policy-nirp.asp#:~:text=A%20negative%20interest%20rate%20policy%20(NIRP)%20is%20an%20unconventional%20monetary,lower%20bound%20of%20zero%20percent.
Hiner, J. (2021). Accommodation and Food Services in the US: US Industry (NAICS) Report 72, IBISWorld. 1-45.
Ilori, A. E., Paez-Farrell, J., & Thoenissen, C. (2022). Fiscal policy shocks and international spillovers. European Economic Review, 141, 1-26.
Kenton, W. (2022). Debt-to-GDP Ratio. Retrieved 19 April 2022, from https://www.investopedia.com/terms/d/debtgdpratio.asp.
Kobayashi, A., & Bremer, M. (2022). Lessons from mergers and acquisitions of regional banks in Japan: What does the stock market think?. Journal of the Japanese and International Economies, 64, 1-16.
Monetary Policy Report - February 2022. (2022). Retrieved 19 April 2022, from
https://www.federalreserve.gov/monetarypolicy/2022-02-mpr-summary.htm
Sakuragawa, M., & Sakuragawa, Y. (2020). Government fiscal projection and debt sustainability. Japan and the World Economy, 54, 1-9.
The Investopedia Team. (2022). The Impact of Recessions on Businesses. Retrieved 19 April 2022, from https://www.investopedia.com/articles/economics/08/recession-affecting-business.asp.