Macro Economic Policy and Agriculture Fiscal Policy Tools –Government spending –Taxation Monetary Policy Tools –Discount rate –Open market actions –Reserve requirements 25 Chapter 2 pages Knutson, Penn and Flinchbaugh

Monetary Policy Easy money or expansionary policy –Increases Money Supply leads to lower interest rates and value of dollar –Buy Bonds –Reduce reserve requirement –Decrease discount rate Tight money or concretionary policy –Decrease Money Supply leads to higher interest rates and value of dollar –Sell Bonds –Raise reserve requirement –Increase discount rate

Impact of Strong Dollar on Export Demand

Interest Rate Value US$Qt MoneyV$ 0 I0I0 V$ S$ D$ Tight Money Policy Increases the Value of the US Dollar

Interest Rate Value US$Qt MoneyV$ 0 I0I0 V$ S$ D$ Easy Money Policy Decreases the Value of the US Dollar

Interest Rate Value US$Qt MoneyV$ 0 I0I0 V$ S$ D$ Increasing Taxes Decreases the Value of the US Dollar

Weaker Dollar Impact on Exports Yen P Exchange Rate Q/yr $ P Dom D 0 Supply 0 ED 0 S Export 0 P FT QS 0 QD 0 QT 0 ExporterTrade Sector T D 0 1:1 1 1 ED 1 QT 1 P2P2 P FT P2P2

Stronger Dollar Impact on Exports Yen P Exchange Rate P2P2 Q/yr $ P Dom D 0 Supply 0 ED 0 S Export 0 P FT QS 0 QD 0 QT 0 ExporterTrade Sector T D 0 1:1 1 1 ED 1 QT 1 P2P2

Domestic Demand Domestic SupplyExcess Supply Demand Exports Qt Export 0 Price 0 World Price 0 Qt TradedQt per Year QS 0 Impact of Stronger US Dollar on Trade Stronger US Dollar makes prices of US products more expensive to ROW If prices of exports are higher SHOW this as a lower Export Demand Lower exports and Quantity supplied in the US Lower US price Higher price in ROW World Price 1 Price 1 Qt Export 1 New Demand Exports

Macro Economic Impacts on Agriculture Inflation in prices of inputs Ag more dependent on purchased inputs than in past Income statement affects of inflation Profit = TR – TC Profit = (P Y * Q Y ) – (P X *Q X )– I * (Loan + P X *Q X ) Inflation raises P x and real interest rate I Inflation raises P Y about 66% as much but 5 years later

Supply or Sum MC Pre-Inflation Supply or Sum MC After-Inflation QT/Year P/Unit Total Demand Increased Cost from A to C, but Price Increase A to B P0P0 P1P1 A B C Cost Price Squeeze Increased cost of production shifts Supply or MC from A to C Quantity produced falls causing price to increase P 0 to P 1 or E to B But price increase (EB) is less than cost increase (AC) E

Macro Economic Impacts on Agriculture Balance Sheet impacts Net Worth = Assets – Liabilities NW = P A *Q A –Debt Land –Debt Mach –Debt Operating Loan Inflation increases P A and encourages more debt If interest rates on debt are fixed, repay debt with lower real valued dollars