Financial management environment
28 July 2024 15:14
Macroeconomic policy targets
Concerned with issues affecting the economy as a whole
1. Economic growth
2. Inflation
3. Unemployment
1. Economic growth: an increase in national income, which interprets as a rising standard of
living
2. Control price inflation: managing price inflation to a low, stable level. If a country has a
relatively high inflation, then companies in that countries can become less competitive relative
to its international trading rivals.
3. Full employment
4. Balance of payments stability: if imports exceed exports this is often called as balance of
payment deficit. This situation can be corrected by the government by manipulating the
exchange rate to switch spending away from imports to exports.
• Expansionary macroeconomics policies can be adopted
1. To increase demand (spending) in the economy
2. In order to stimulate economic growth
3. Create the need for new jobs
• Contractionary macroeconomics policies:
1. Are required to keep inflation within acceptable limits
2. To reduce domestic spending on imports
Macroeconomics policies
Policy type Definitions
Fiscal policy Using govt spendings and taxation in order to manage demand
Monetary Aims to influence monetary variables such as interest rate and the money supply
policy
Exchange rate Fix the exchange rate( fixed rate policy), allows to change in response to the
policy market(floating rate policy), take action to influence its value ( a managed exchange
rate policy)
Government will adopt a mix of these policies
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, Government will adopt a mix of these policies
Impact on business of fiscal policy
• Spending more or less money on services
• Changing the rate of direct taxes
• Changing the rate of indirect taxes
Increased govt spending or lower taxes will boost aggregate demand and is likely to increase sales.
Impact on business of monetary policy: increase in interest rate
• Affects the borrowing cost of the business
• Fewer investments show positive results
• Downward pressure on share prices, making more difficult to raise money from share issues
• Decrease in consumer demand
Impact on business of exchange rate policy:
• Affects the value of sales revenue
• Costs that are in a foreign currency
Market failure:
Occurs when market mechanism fails to work efficiently
Types of market failures:
1. Imperfect competition- one company having large market share Is leading to inefficiency or
excessive profits.
2. Social costs- impacts on third party of an economic transaction where these effect society as a
whole
3. Imperfect information- where false information has being put into public
4. Fairness- resort to regulation to improve social justice
Imperfect competition:
• Oligopoly- few large firms dominates the market
• Monopoly- one large firm dominates the market, any firm with market share above 25%
Competition policy
• Competition policy refers to government regulations and guidelines to promote fair business
competition. It is aimed at curbing price fixing and monopolies, facilitating startup market
access, ensuring efficiency, boost economic growth and consumer welfare using legislation
and enforcement authorities.
• Oligopoly situations involving explicit or implicit collusion between firms, who together control
the market.
• Monopoly is acting against the public interest.
Corporate governance regulations
Tighter regulation imposes costs on a business but it can also act to increase the confidence of
investors that the company is being run responsibly.
Government assistance for business grants may be available to attract firms to invest in depressed
areas.
Green policies and sustainability issues
• The failure of the market to recognise positive and negative externalities may lead to
government actions, this may either threaten a business or create opportunities.
• Such regulations will add pressure to companies to consider sustainability issues when making
financial management decisions.
New Section 1 Page 2
28 July 2024 15:14
Macroeconomic policy targets
Concerned with issues affecting the economy as a whole
1. Economic growth
2. Inflation
3. Unemployment
1. Economic growth: an increase in national income, which interprets as a rising standard of
living
2. Control price inflation: managing price inflation to a low, stable level. If a country has a
relatively high inflation, then companies in that countries can become less competitive relative
to its international trading rivals.
3. Full employment
4. Balance of payments stability: if imports exceed exports this is often called as balance of
payment deficit. This situation can be corrected by the government by manipulating the
exchange rate to switch spending away from imports to exports.
• Expansionary macroeconomics policies can be adopted
1. To increase demand (spending) in the economy
2. In order to stimulate economic growth
3. Create the need for new jobs
• Contractionary macroeconomics policies:
1. Are required to keep inflation within acceptable limits
2. To reduce domestic spending on imports
Macroeconomics policies
Policy type Definitions
Fiscal policy Using govt spendings and taxation in order to manage demand
Monetary Aims to influence monetary variables such as interest rate and the money supply
policy
Exchange rate Fix the exchange rate( fixed rate policy), allows to change in response to the
policy market(floating rate policy), take action to influence its value ( a managed exchange
rate policy)
Government will adopt a mix of these policies
New Section 1 Page 1
, Government will adopt a mix of these policies
Impact on business of fiscal policy
• Spending more or less money on services
• Changing the rate of direct taxes
• Changing the rate of indirect taxes
Increased govt spending or lower taxes will boost aggregate demand and is likely to increase sales.
Impact on business of monetary policy: increase in interest rate
• Affects the borrowing cost of the business
• Fewer investments show positive results
• Downward pressure on share prices, making more difficult to raise money from share issues
• Decrease in consumer demand
Impact on business of exchange rate policy:
• Affects the value of sales revenue
• Costs that are in a foreign currency
Market failure:
Occurs when market mechanism fails to work efficiently
Types of market failures:
1. Imperfect competition- one company having large market share Is leading to inefficiency or
excessive profits.
2. Social costs- impacts on third party of an economic transaction where these effect society as a
whole
3. Imperfect information- where false information has being put into public
4. Fairness- resort to regulation to improve social justice
Imperfect competition:
• Oligopoly- few large firms dominates the market
• Monopoly- one large firm dominates the market, any firm with market share above 25%
Competition policy
• Competition policy refers to government regulations and guidelines to promote fair business
competition. It is aimed at curbing price fixing and monopolies, facilitating startup market
access, ensuring efficiency, boost economic growth and consumer welfare using legislation
and enforcement authorities.
• Oligopoly situations involving explicit or implicit collusion between firms, who together control
the market.
• Monopoly is acting against the public interest.
Corporate governance regulations
Tighter regulation imposes costs on a business but it can also act to increase the confidence of
investors that the company is being run responsibly.
Government assistance for business grants may be available to attract firms to invest in depressed
areas.
Green policies and sustainability issues
• The failure of the market to recognise positive and negative externalities may lead to
government actions, this may either threaten a business or create opportunities.
• Such regulations will add pressure to companies to consider sustainability issues when making
financial management decisions.
New Section 1 Page 2
