18 September 2009

Gap Analysis: Global Communications

Gap Analysis: Global Communications

Global Communications is currently among one of the telecommunication industry’s companies that is waning. Its stock has lost more than 50 % in value and Global Communications will face so challenges in making it appreciate again. Global Communications is also facing an increasing number of competitors. Global Communications has to look at all the current issues to try and find opportunities that may lie among them. Global Communications has to focus on choosing the right problems that will present the most opportunities to stay competitive and that are synced with the company’s goals.

Global Communications situational analysis shows that the primary issues and opportunities for them are their competitors and the stock’s depreciation. The management team has developed a strategic plan to secure the financial future for the business. The strategic plan has identified its primary issues and opportunities that will hopefully lead the company to becoming a competitive global firm.

Situation Analysis

Issue and Opportunity Identification

Global Communications have developed a strategic plan but without consulting the union which has caused a veil of distrust. The union just recently agreed to a 20 % cut in education and health benefits so it has come as a surprise to the union that the company has plans in motion for layoffs and out-sourcing. The senior management team did not include the union when developing the strategic plan.

This would be a good time for the company and the union to enter into integrative negotiation. Integrative negotiation is used when an agreement can be found that is better for both parties than what they would have reached through distributive negotiation. Integrative negotiation calls for a progressive win-win strategy (Kreitner & Kinicki, 2004, p. 504).

Global Communication stock has dropped significantly within three years and the increase in competition has required GC to look into a new direction. In this kind of situations, Bateman and Snell (2004) might suggest nonprogrammed decisions that can be used for diversification into new products and markets. They have already implemented something like this by making the decision to do some outsourcing and laying people off without consulting the union. They have already made an alliance with a satellite company that will increase the products they are able to offer as well as partnering with a wireless company. Another thing they need to work on is their global marketing.

To find a new way to market their products Global Communicating should first look at their current marketing methods. This would be defined as the first step in problem solving by De Janasz, Dowd and Schneider (2002). To continue with this process the next step would be brainstorming which will give the opportunity for creative thoughts and ideas in how to approach global marketing. Once they have come this far they will need to organize the choices and then make some decisions on which are the best and most viable suggestions. Then implementation is the last step and should be incorporated when they have a solid focus on their new products and services they can offer globally.

For a company to be a smooth, efficient company, the communication system in place must do its job. Without a way to keep employees and the public informed the company would not be able to run effectively. Communication with employees at this time is very important, as there will be a great deal of changes in the near future.

First the senior management has to choose the best medium to communicate the changes that will be coming. According to Kreitner and Kinicki (2004), choosing the appropriate media depends on many factors, including the nature if the message, its intended purpose, the type of audience, proximity of the audience, time horizon for disseminating the message and personal preferences. The fact that the strategic plan has already leaked to the board members of the union shows that the time horizon for informing the employees is immediate. The sooner the management gets the message out on what is going on and why the better. They should also be quick to implement some of the ideas that were brought up at the meeting like implementing career counseling.

Stakeholder Perspectives/Ethical Dilemmas

There are four main stakeholders in this scenario, the Management that represents Global Communications, stockholders, the union and employees and the customers.

The customers’ main interests are the cost of doing business with Global Communications. Customers are also looking to see if the company is staying up to par in regard to technology and services. They want to be treated fairly and want the product to be reliable. Customers are what sustain a company and they should be provided with world-class customer service, which can keep customers even through hard times.

The union’s main concern is how the employees are treated and what benefits they receive. The union tries to be fair when negotiation but they must put the employees first. Global Communications is expected to be honest and loyal. Employees have been loyal in the past to Global Communications as they have always been rewarded for it but with the new strategic plan there is a conflict due to the outsourcing and layoffs.

Management has a priority to reduce costs yet increase services. They are focusing on becoming a global competitor and believe that outsourcing is the way to go to achieve this. For management to work effectively they must work together cooperatively and coordinate with each other when trying to make decisions that effect the company as a whole. The management wants discipline within the company and must communicate effectively to make sure policies, rules, and company ethics are well known and upheld.

Stockholders main interest is the price of the stock. They want to know who needs to be held accountable for the drop in stock prices as well as who will be the one to bring the stock back up. Stockholders value reliability in the sense that if Global Communications has a good product then they can rely on the stock increase again. This is also in line with having quality products and services.

The main ethical dilemma and conflict of interest is between management and the union when it comes to outsourcing jobs and laying people off. The union feels it has been very flexible in reducing costs by taking a 20 % cut in benefits but management has disregarded this and decided layoffs and outsourcing is a better way to cut even more costs. There was a major lack of communication between the two parties.

End-State Vision

Global Communication’s End-State Visions will provide the company a set of measures to focus on and how they were able to overcome their problems to reach a successful conclusion.

The company’s end-state vision is:

“Become a global competitor with our ability to provide new satellite and wireless services, and all of our old reliable services customers were accustom to at a rate that keeps us competitive but never forgetting that our customer service must be top notch. We need to reestablish and build our relationship with the union and our employees who are the backbone of the company.”

Gap Analysis

First Global Communication must solidify its relationship with both the satellite provider and the wireless provider so they can start offering package bundles to their customers. Once this is accomplished a marketing plan needs to be put in place to globally announce these new products and packages.

To be able to provide these services at competitive prices, the company will need to cut costs and sustain itself on less. This need is being filled by outsourcing technical services to Ireland and India, which will reduce the costs of handling calls by nearly 40 %.

The communication process between the union and management needs to be fixed. The union has a strong influence on the employees and could cause many problems if an attempt is not made to repair the problem. Global Communications wants a strong workforce they can rely on and to do this the flow of information needs to be controlled as well as effectively disseminated.


The Global Communications situation has provided an interesting look into the current issues some telecommunication companies are currently facing. The company’s stock had depreciated by more than 50 % in a three-year period and there was tremendous economic pressure from Wall Street to have the company rebound to a more profitable share. Global Communication has seen its competition increase and cable companies introduce bundle packaging.

To try to compete with these services Global Communications has to grow by joining with a satellite and a wireless provider. If they focus on the new services they can provide and bundle packages, they will be come as competitive as the cable companies. To go beyond the cable companies, Global Communications will need to focus on their international business as well. Their global marketing strategies as well as their outsourcing will help them go in this direction.

Global Communication has to repair its relationship with the Union and try to work with them on helping employees with the change that will come due to the strategic plan the senior management has put together. They have to work on the communication strategy so that the union and employees are better informed.


Bateman, T. S., & Snell, S. (2004). Management: The new competitive landscape (6th ed.). New York: The McGraw-Hill Companies.

De Janasz, S.C., Dowd, K.O., & Schneider, B.Z. (2002) Interpersonal skills in organizations. New York: The McGraw-Hill Companies.

Kreitner, R., & Kinicki, A. (2004). Organizational behavior (6th ed.). New York: The McGraw-Hill Companies.

McShane, S. L., & Von Glinow, M. (2005). Organizational behavior: Emerging realities for the workplace revolution. New York: The McGraw-Hill Companies.


Table 1

Issue and Opportunity Identification



Reference to Specific

Course Concept

(Include citation)


Global Communications has developed a rocky relationship with the union with several mistakes they made one being that they did not ask for input from them when developing the recent plan. Part of the plan is to relocate and reduce salaries and this looks like undermining the contract they just negotiated with the union to reduce health benefits and education benefits by 20%.

Have an immediate meeting with Marie Antez and other union members for a brainstorming session to come up with other solutions that could lead to a win-win situation.

“Compromising is a give-and-take approach involving moderate concern for both self and others. Compromise is appropriate when parties have opposite goals,”(Kinicki & Kreitner, 2003, p. 500)

Handling Dysfunctional conflict by compromising.

Global Communication is facing a lot of competition, which has made their stock drop more than 50%. This has decreased the confidence of stockholders, which is putting pressure on management.

Becoming a global competitor by increasing new services and bettering old ones.

“Nonprogrammed decisions are novel and unstructured. [They cause] much uncertainty regarding cause-and-effect relationships. [It’s a] necessity for creativity, intuition, tolerance for ambiguity and creative problem solving. [This is good for] diversification into new products and markets,”(Bateman & Snell, 2004, p.67)

Non-programmed Decisions

Global Communication’s employees will feel that the company has let them down and may become angry when the layoffs or changes come about due to outsourcing. GC has not give their employees any warning of this plan.

The opportunity to communicate with employees in regards to the options they may face. Provide information on employees’ options to stay and move to other departments or encourage them to relocate with the thoughts of new experiences in new places and make sure employees are aware of severance for the employees that must be let go.

“Communication refers to the process by which information is transmitted and understood between two or more people,”(McShane & Glinow, 2005, p.324)


Table 2

Stakeholder Perspectives

Stakeholder Perspectives

Stakeholder Groups

The Interests, Rights, and

Values of Each Group


The cost of doing business with GC and getting a good product for their money. Customers expect to be treated fairly and the product to be reliable.


The Union focuses on the benefits and rights of employees. The Union tries to be fair in its negotiations. Employees want to keep their jobs and think their loyalty should be rewarded.

Management/Global Communication

Management’s interest is in cutting costs and making a profit. They also want to become a global competitor. Management relies on cooperation and coordination within its senior team

Stock holders

Want the GC’s stock to go back up. Their values lie in the quality of products and services GC is providing that will increase over value of the stock. They want to know who is accountable for the stock’s decline.

Table 3

End State Goals

End-State Goals

GC must solidify its alliance with the satellite provider and start marketing this new resource that GC will have.

GC has to partner with a wireless provider to be able to offer small businesses more ways to stay in contact and have anytime Internet access.

GC has to reduce costs to customers while at the same time becoming a company that can sustain itself on less.

GC will come up with a global marketing plan within the next quarter.

Repair relationship with the union and employees.

Emotional Intelligence

No matter what company anyone works for, emotions will always factor into the workplace. “Emotions create a stats of readiness...They make us aware of events that may affect our survival and well-being. Some emotions are particularly strong triggers that demand our attention, interrupt our train of thought, and generate the motivation to act on the environment,” (McShane & Von Glinow, 2005, p.111).

Blockbuster had a good idea with their GameRush stores as their were implementing a form of FISH!. McShane and Von Glinow define FISH! as: play, make their day, be there and choose your attitude. By having tournaments and having their employees wear “hip” attire, Blockbuster gave employees the opportunity to have fun with video games, interact with customers, and come to work with a can-do attitude.

Healthy emotional intelligence among employees can prepare them better for the unexpected at work like sudden layoffs, mergers or changes within the company. EI requires people to have “the ability to perceive and express emotion, assimilate emotion in thought, understand and reason with emotion, and regulate emotion in oneself and others,” (McShane & Von Glinow, 2005, p. 131). With several companies as well as with Global Communication EI was not present in the executives meetings and was limited in the meeting with the union. The ability to regulate emotions within meetings is something most executives should strive for. According to McShance and Von Glinow one must master relationship management which is the highest level of EI and requires proficiency in the other 3 dimensions of EI, self-awareness, social awareness, and self-management.


McShane, S. L., & Von Glinow, M. (2005). Organizational behavior: Emerging realities for the workplace revolution. New York: The McGraw-Hill Companies

The Cultural Challenges of Doing Business Overseas - MMPBL/501 FORCES INFLUENCING BUSINESS IN THE 21ST CENTURY

It can be challenging for an American company to be successful overseas. When attempting to go overseas with a bushiness venture they have to take some risks when making business decisions. The franchisor for Chicago Style pizza, Steve Kafka, is an American of Czech origin and he has decided to try his hand at expanding his business to the Czech Republic. When he first became a franchisor it was a risky decision and he had to overcome a great deal of difficulties. Kafka anticipates these same kinds of problems when he opens his new location in the Czech Republic. He was born in the United States but has family and friends in the Czech Republic and he speaks fluent Czech. Kafka has visited the Czech Republic several times, which has helped him understand the people and the culture. For this business venture to be successful Kafka has to take into consideration cultural differences and evaluate how these will affect the business decisions he must make. Kafka has to also become familiar with any trade barriers he might have with the Czech Republic and how to deal with the macroeconomics and microeconomics realities that will affect how he prices his pizzas.

Kafka may be familiar with the Czech culture but he has to keep in mind that there are still differences in handling business in the U.S. versus the Czech Republic. Another thing that he has to keep in mind is that although he is going global that does not mean that it will be just like in the U.S. Taking the environment and capitalizing on it when franchising into a foreign country can be a successful way to enter new markets. One thing that Kafka should take into consideration is keeping operating expenses down. He can do this by using the local markets in the Czech Republic for ingredients instead of having to import them. By not importing these items, he is minimizing the risk in one area that could fail. Kafka will have to take into consideration how the Czech people like their dining environment compared to Americans. In Europe, dining is a more social event and needs more of a relaxing environment whereas in America, most like to get in and out of a place so the actual environment isn’t as important.

When evaluating the Czech business environment, Kafka should take into consideration Hofstede’s four primary dimensions (Hodgetts, Luthans and Doh, 2005). In order for him to ease successfully into the Czech Republic business environment, it will be helpful for Kafka to determine which category the Czech Republic fits into. The best way for Kafka to accomplish this is to use his personal experiences, discussions with friends and family there as well as researching the country.

The power distance of the Czech Republic is 57(Clearly Cultural, n.d.). In the United States the power distance is 40, this can be good for Kafka because he is the person in the position of power. If he is a good leader, his employees will be more willing to be subservient than in the United States. The uncertainty avoidance in the Czech Republic is 74 (Clearly Cultural, n.d.) which is much higher that the U.S.’s 47. This can affect Kafka because the Czech employees will expect the expansion to be successful and that they will have jobs in the future. A benefit for him is that the employees in the Czech Republic will accept lower wages. In regard to individualism, the Czech Republic is in them idle with an index of 58. Kafka will have to make a big adjustment here, as the U.S. index is 91. This is where Kafka has an advantage because he already knows the Czech culture is a tight knit type of people and this is how he was raised. The masculinity index is around a 57 (Clearly Cultural), which is lower than the U.S. and shows that in the Czech Republic women are considered to be almost equal where powerful, successful women are respected.

Franchising in a new country will always have some kind of barriers. Although the Czech Republic is a country where it is not expensive to enter the business trade, there are trade barriers, court proceedings and complicated tax legislations to consider. The European Union has specific rules and policies that must be followed. According to the U.S. Commercial Service 2008, Kafka has to take into consideration the value-added tax of 9% that is charged for select goods such as food and services and the 19% for all other goods both domestic and foreign sold in the Czech Republic Another tax he has to consider is the excise tax which is “…imposed on the following goods produced or imported into the Czech Republic: fuels and lubricants, tobacco products, beer, wine and liquor. The rate is determined by the type and quantity of the product and must be paid within ten days after being notified by the Customs Office of the tax amount due,” (US Commercial Service, 2008).

Cost structure is an important part of business planning when considering franchising. IN the Czech Republic, Kafka can take advantage of cheap labor. According to the Czech Republic website, now is a good time to start franchising because the younger generation is adopting more of a Western culture when it comes to eating out. Pizza is considered a treat because many people still do not go out as much as they do in the U.S. Kufka has to take this into consideration when deciding on a price for his pizza. It is the older generation that has the disposable income where as it is the younger generation that is more likely to eat out. Kafka should have introductory prices to attract all the customers for example, buy one slice get another slice half off with a free soda. He has to take into consideration that pizza is a very high elastic item and that if he charges too much no one will be interested in visiting his place.

When deciding to do business in a new country, many things need to be taken into consideration. The cultural differences will impact how business is done. Trade barriers and minimizing costs need to be taken into consideration. Although Kafka has a background that supports his knowledge of the Czech culture and people, it is advisable that he does research to make sure that he approaches this business venture in the right way. As long as Kafka incorporates his knowledge and the local community, his venture into franchising overseas should be successful.


Clearly Cultural. (n.d.). Making Sense of Cross Cultural Communication. Retrieved August 8, 2009, from http://www.clearlycultural.com/geert-hofstede-cultural-dimensions/power-distance-index/

CultureGrams. (2009). Czech Republic. Retrieved August 7, 2009, from http://online.culturegrams.com.ezproxy.apollolibrary.com/secure/world/world_country.php?contid=5&wmn=Europe&cid=41&cn=Czech_Republic

Czech Republic - The Official Website. (n.d.). Visit Czech Republic. Retrieved August 8, 2009, from http://www.czech.cz/en/economy-business-science

Hodgetts, R. M., Luthans, F., & Doh, J. P. (2005). International Management: Culture, Strategy, and Behavior (6th ed.). New York: The McGraw-Hill Companies.

US Commerical Service. (2008). Czech Republic: Trade Regulations, Customs and Standards. Retrieved August 6, 2009, from http://www.buyusa.gov/czechrepublic/en/118.html


Verizon Wireless is a company that operates within the telecommunications and technology industry. Regardless of the current economic condition, Verizon Wireless, a joint venture of Verizon Communication and Vodafone, has had a continued rise in subscribers since 2001. Some of the macroeconomic variables that may affect the industry as a whole are unemployment/employment, personal disposable income, inflation and the stock market. Each of these variables has an influence in the future of the telecommunications industry.

Verizon Wireless, just like its competition, is constantly changing. They are adapting to the new technologies that develop and the demands of their customers as soon as they can. Although the unemployment rate has fluctuated between 6% and 4.5% from 2003 to 2007 (U.S. Department of Labor, n.d.) there were periods that were higher but did not influence the rise in subscribers to Verizon Wireless. In the below graph, it illustrates how Verizon Wireless still had an increase in subscribers although there were times when unemployment reached a high of 6 %.

According to the graph, from 2001 to 2007 the number of people who subscribed to Verizon Wireless increased from 29.4 million in 2001 to 65.7 million in 2007. During this time the unemployment rate reached a peak of 6 % and a low of 4.6% which did not hinder Verizon Wireless from attaining new subscribers.

Disposable income “is personal income less personal taxes,” (McConnell & Brue, 2006, p.121) which people can use as they choose by either spending or saving. The Economist Intelligence Unit Limited (2009) Web site has personal disposable income rising in conjunction with the median income going up according to the U.S. Census Bureau. The graph below shows the average disposable income and average income rising over the same period as subscribers and unemployment rates. While incomes are increasing people are choosing to limit their bills by switching from wired phone lines and wireless to wireless only.

“The mega-trends in telecommunications - the shifts from analog to digital technology, from wired to wireless platforms, and from narrowband to broadband services – have fundamentally changed the way people communicate.” (Verizon Communications, 2008). A change in how many people have wireless only service has helped Verizon Wireless increase their subscribers. By the end of 2008 one in five American households may well not have a home phone line according to a The Nielsen Company (2008). “At the end of 2007, 16.3 percent of U.S. households had abandoned their landline phone for their wireless phone, but by the end of June 2008, just 6 months later, that number had increased to 17.1 percent,” (The Nielsen Company, 2008).

Although incomes have been rising, consumers are going wireless only. In the graph below it compares households that have both landline and wireless, only landline and only wireless. The trend to go wireless has been growing at a very fast pace. It jumped from 3.2% to 13.6% in five years and is projected to jump to 20% by 2012 according to Verizon Communications (2008).

The telecommunications industry has many opportunities to expand their business as technology changes everyday. By developing new ways to connect to people, the challenges of marketing to customers and keeping them have also evolved. Verizon Wireless has used to its advantage that “49% of Americans are starting to see cell phones as a necessity,” (Morin & Taylor, 2009). Many of the plans offered include long-distance so there is a cutback in costs to keep in contact with friends and family out of the local area. Another attraction Verizon Wireless offers are the new phones that come out constantly and with those come contracts. This will continuously create profits for the determined amount of time plus the cost of the new phones.

Research costs into new phones, software, marketing and customer service can initially be high but projected sales, demand for carrier specific items and keeping loyal customers more than makes up for the initial cost. All these challenges help stimulate the economy by training people, increasing sales there fore increasing profit that can be redistributed.

Competition is a challenge that all wireless companies face. In 2003, under a program called Local Number Portability, wireless customers were able to change carriers and keep their existing wireless phone numbers. Verizon Wireless has faced this battled by providing one of the most reliable networks in the United States and by providing broadband network capabilities. All these new services and maintenance to the network needs to be supported by employing more workers which helps reduce the unemployment rate. Verizon Wireless can contribute to the economy by employing people and by providing consumers what they want at a reasonable price.

Although the unemployment rate has varied, Verizon Wireless customers have increased at a steady rate. Part of this could be the increase in disposable income or the move to go from a wired-line to a wireless line. Many macroeconomic variables like unemployment, disposable income, inflation and stock market have an affect on the telecommunication industry. Competition and technology are some of the challenges faced by Verizon Wireless. There are several ways for them to combat this by providing a superior product, many options and a reliable network. The more the company needs to rise to the challenge of competition, the more employees will be needed to meet this challenge.


DeNavas-Walt, C., Proctor, B.D. & Smith, J.C. (2008). Income, Poverty, and Health Insurance Coverage in the United States: 2007. US Census Bureau. Retrieved July 31, 2009, from http://www.census.gov/prod/2008pubs/p60-235.pdf

The Economist Intelligence Unit Limited. (2009). Data Tool. Retrieved August 2, 2009, from http://data.eiu.com/EIUTableView.aspx/personal_disposable_income

McConnell, C.R. & Brue, S.L. (2005). Economics. Principles, problems, and policies (16th Ed). New York: The McGraw-Hill Companies.

Morin, R. (2009). Luxury or Necessity? The Public Makes a U-Turn. Pew Research Center. Retrieved August 1, 2009, from http://pewsocialtrends.org/pubs/733/luxury-necessity-recession-era-reevaluations

The Nielsen Company. (2008). Call My Cell: Wireless substitution in the United States. Retrieved August 2, 2009, from http://www.nielsenmobile.com/documents/WirelessSubstitution.pdf

United States Department of Labor. (n.d.). Household Data Annual Averages. Retrieved August 1, 2009, from ftp://ftp.bls.gov/pub/special.requests/lf/aat1.txt

Verizon Communications. (2008). . Retrieved August 1, 2009, from http://investor.verizon.com/profile/industry/.

Wong, Wailin. (2008). USA telecoms: Cellphones to ring up sales even in time of recession. ViewsWire. Retrieved August 1, 2009, from http://viewswire.eiu.com/article1483133133.html?pubtypeId=1162462501&text=cell%20phones


Macroeconomic Impact

The Federal Reserve Board has three many tools that is uses to control the supply of money in the United States. These three tools are the reserve ratio, the discount rate and open-market operations. When the Fed uses thee tools they influence the money supply and affect macroeconomic factors. I will discuss how money is created and when it needs to be increased or decreased in supply. I will also discuss how the three tools the Fed uses affects our economy. I will discuss to specific monetary policies that combined that will achieve a balance between economic growth, low inflation and a reasonable rate of unemployment.

Current money is based on how money first came in to play. According to Hayne, Boettke & Prychitko, people did not like having to barter with gold and silver and other metals because it was hard to regulate the quality of the product as well as the fineness of it. Merchants and wealthy people who owned bars of gold and silver started looking for a place that would be safe to store them and in doing so found goldsmiths to be the solution. The goldsmiths issues receipts when securing the items and this was perhaps the first form of paper money.

“At this point the goldsmiths-embryonic bankers-used 100 percent reserve system; they backed their circulating paper money receipts fully with the gold that they held ‘in reserve’ in their vaults,” (McConnell & Brue, 2005, p.253).

Eventually goldsmiths realized that paper receipts could be issued in excess of the amount of gold held according to McConnell and Brue. Goldsmiths put into circulations these receipts by making interest-earning loans to merchants, producers and consumers. Everyone accepted loans in the form of gold receipts as a medium of exchange in the marketplace.

The basic condition of money is that everyone has to accept the form of currency as a medium of exchange without this acceptance no matter what anything is printed on or how it is printed it will have no value. What is currently in use today as the medium of exchange consists almost entirely of the IOUs of trusted institutions (Heyne, Boettke & Prychitko, 2006, p.400). The Federal Reserves notes are the combination of coins and paper money that has become the trusted medium of exchange.

There are three ways the Federal Reserve can control the money supply: changing the required reserve ratio, changing the discount rate and engaging in open market operations. The required reserve ratio establishes a link between the reserves of the commercial bank and the deposits (money) that commercial banks are allowed to create. If the Fed wants to increase the money supply, the Fed can decrease the required reserve ratio, which allows the banks to create more deposits by making loans.

The discount rate is the interest rate the Fed charges banks for short –term loans according to Heyne, Boettke & Prichtko. If a bank borrows from the Fed it leads to an increase in the money supply. If the discount rate is high, it will cost more to borrow money, which then leads banks to do less borrowing.

When the Fed purchases or sells government securities in the open market it is called open market operations. This is a tool that is used to increase or decrease the amount of reserves in the system and in turn the money supply. This tool is the most significant tool the Fed can use to control the supply of money. It can be used with a certain amount of accuracy, is flexible and is fairly predictable. Through the open market operations, the Fed can have the money supply be whatever value it wants.

How Money is created

The Fed can increase the supply of money by using its three most powerful tools and by doing this they are creating money. When expansionary monetary policy is in effect, decreasing the reserve ratio will give commercial banks the ability to lend to more customers. When the Fed decides to lower the discount rate, the Federal Reserve Bank will lend more money to the commercial bank which will increase the money supply by increasing the amount commercial banks have in reserve. This allows banks to have more available funds for lending. When the economy is showing signs of recession and unemployment, the Fed can buy securities to increase commercial bank reserves. The open-market operation is the most common tool used through the sale and purchase of government bonds.

“In addition, the Federal Reserve can use "moral suasion" by pressuring certain market participants to act in a particular manner or through "open mouth operations" where the Fed states what goal it will be focusing on in hopes of getting the market to build these future monetary actions into expectations and thus increase the effectiveness of the current monetary actions,” (Keefe, 2008).

Recommended Monetary Policy

When determining the levels of money supply the Fed uses the Monetary policy which is “the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy,” (Wikipedia, n.d.). According to McConnell and Brue, the advantages over fiscal policy are the speed and flexibility, and the isolation from political pressure. When the Fed uses the open-market operation to sell or purchase government securities daily to affect the money supply and interest rates, its affects are felt immediately. When adjusting a combination of discount rates and reserve requirements, the Federal Reserve Bank can influence how the monetary policy is used to achieve a reasonable balance between inflation and economic growth. During a recession, like in 1990s, using the Easy Money Policy would be a good way to try to jump-start the economy. The drawback in using this policy is that it can create too much money and spending. When this happens it can lead to inflation which needs to be curbed by the Fed who would reduce reserves in the banking system by raising interest rates (McConnell & Brue, 2005, p. 281). The Tight Money Policy incorporates the increase in interest rates with raising the discount rate and selling securities to decrease spending and control inflation. This two policies used correctly can help achieve an environment with a stable economy.

Economics for Managerial Decision Making

In the Monetary Policy simulation provided by the University of Phoenix (2009), scenarios were presented to students in regard to monetary policy. The simulation put a student in the position as the Chairman of the FED and required that person to make decisions with the tools available to the FED to control the supply of money. By using the tools the student gets to see how they affect the Real Gross Domestic Product (Real GDP), the Inflation Rate and the Unemployment Rate. These are the three main macro-economic indicators that can be affected by the money supply. In the one scenario the economy is in a slump, industrial production is slow and unemployment seems to be rising. Using all three tools available, I did not touch the Discount Rate (DR) and Federal Funds Rate (FFR) spread, decreased the Reserve Ratio to 9.1 and sold $500 million government securities in the Open-Market. The results of my choices were an increase in the Real GDP to 6.59% from 2.54%, inflation rose from 4.4% to 8.15% and unemployment decreased from 7.25% to 6.21%. By selling the securities, the supply of money went up which also increased inflation. When the Real GDP increases the usual result is a decrease in unemployment which is what happened in my scenario. This simulation made it possible to see how the monetary policy affects the economy and how the FED controls the supply of money through its three major tools.


The required reserve ration, the discount rate and the open-market operations are the three tools of monetary policy that the FED uses to control the supply of money. A combination of these tools will be used during a recession or growth through either an expansionary monetary policy or contractionary monetary policy. These policies will influence the commercial banks and anyone else who can create money. Banks will have more flexibility to lend money when the FED lowers the required reserve ratio also making them more willing to do so. When lowering the discount rate, the FED is allowing commercial banks to borrow more from the Federal Reserve Bank which increases the availability of money for lending. The open-market where government securities are bought and sold is the most common tool used and increases commercial bank reserves. This tool is used daily through the stock market. For the Fed to be able to act quickly in response to a combination of issues or individual issues like inflation, unemployment and economic growth, the monetary policy is policy that is used.


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