: Implications of Government Fiscal & Monetary Policies Harvard Case Solution & Analysis

Implications of Government Fiscal & Monetary Policies

Application of Macroeconomic Data Analysis

The analysis which has been performed in part II shows that the gross domestic product of the United States has been increasing and somewhat consistent over the past years. The percentage changes had been computed from the year 1948 to 2015.Therefore, if we predict the trend of the future GDP on the basis of the past GDP growth rates, then it could be seen that the GDP would grow at an average rate of 6.5% as shown in the excel spreadsheet.

The growth rates for the two periods, which had been created in part II, have also been calculated.Therefore, based on this increased growth in the gross domestic product of the country, the operations of the firm would also yield much higher performance and the firm would grow rapidly. Furthermore, if we look at the consumer price index based upon the current consumer price index, then the current consumer price index level of about 1.8% in the year 2015 shows that the interest rates would be low and as a result of this the borrowing costs for the firm would also be low(Gordon, 1981).

This trend is also more likely to continue in future as well and as a result of this, the management of the company would be able to raise external financing at lower interest rates and use the funds to grow the business. Furthermore, the inflation rate would also decline as a result of the declining interest rates in the country and thus, the exchange rate movements would also be in the favor of the firm’s domestic and international operations. The risk would decrease and the firm would also get the opportunity to expand its business in international markets. CPI is the ultimate indicator of the government’s economic policy and the current changes in the CPI index levels show that the economic policy of the US government is effective(Hunter, 1991).

Effects of Predicted Trends on Firm Operations

As stated previously that the US economy has been recovering as described in the part II therefore, this would be a positive factor for the firm operating in the country. The operational performance of the company would improve and the declining interest rates and the inflation rate is going to have a significantly positive impact on the financial performance of the firm and it would be able to yield much higher rate of return on assets and on its equity.

The increase in the aggregate demand of the country has resulted in the growth of the gross domestic product over the past years and this would be favorable for the operations of the company. These interest rates are going to have a significant impact on the performance of the company and its ability to raise the required financing(Sharabany, 2004\).

The rationale behind this is that when the interest rates start to rise, then the cost of debt increases and the required rate of return becomes less than the cost of the debt and as a result of this, all the profitable projects are rejected by the management because the cost of raising finance is high and this would impact negatively upon he profitability of the company.The unanticipated changes that might take place regarding the consumer price index, inflation rates, the availability of the credit, money supply and specially the prevailing interest rates might have a negative impact upon the performance return on assets of the firm and its operations.

Therefore, at this point it could be said that the monetary policy of the country is going to have an impact upon the cost of debt of the company.On the other hand, the fiscal policy of the United States has an impact upon the after tax net cash flows of the company, the survival of the company, the cost of capital and the demand for the company’s products. .............................

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