External Influences – Macro-economic Factors

Macro-economic Policy

Governments manage the economy to achieve low inflation, low unemployment, and steady growth. They use two main tools:

1. Fiscal Policy: Government taxation and spending. (e.g., raising corporate tax, spending on infrastructure).
2. Monetary Policy: Controlling the money supply and interest rates, usually via a Central Bank. (e.g., raising interest rates to cool down borrowing).

Inflation and Unemployment

Inflation is the general increase in prices over time. High inflation erodes purchasing power. If a heavy manufacturing firm faces high inflation, its raw material costs soar, squeezing profit margins unless it can raise prices.

Stagnation occurs when economic growth is flat or negative, often leading to higher unemployment.