Money and the Prices in the Long Run and Open Economies
Money and the Prices in the Long Run and Open Economies
In the economy today, it is important to create a progressive market growth plan to help predict the United States allocation of money, prices, and the open economy for many years to come. It is important for these plans to be reliable and transparent in order for them to be effective. Today we will be analyzing the history of changes in GDP, savings, investment, real interest rates, and unemployment and compare to forecast for the next five years, discuss how government policies can influence economic growth, and analyze how monetary policy can influence the long run behavior of price levels, inflation rates, costs, and other real or nominal variables. We will also describe how trade deficits or surpluses can influence the growth of productivity and GDP, discuss the importance of the market for loanable funds and the market for foreign currency exchange to the achievement of the strategic plan, and finally, I will recommend whether the strategic plan can be achieved based on my findings.
Changes in GDP, savings, investment, real interest rates, and unemployment
It is important to know and understand the history and changes in the gross domestic product in the United States. According to Bureau of Labor Statistics (2013), “Since the end of the recession, the U.S. gross domestic product (GDP) has grown at a rate of 2.1 percent annually”. The GDP has been slowly increasing annually since 2009, as the economy has worked to slowly recover from the recession during this time. The personal savings in the United States for 2017 was over 384 billion dollars (Statista, 2018). When it comes to the real interest rates, we can only forecast with a measure of considerable conservativeness. Using the Fischer equation, we are able to use historical information from the Bureau of Economic Analysis to determine the inflation rate (Mankiw, 2015). We have also seen the unemployment rate drop to the lowest it has been since the recession. The unemployment rate 8 years ago was around 9 % but has now reached a record low of 4.1 % (Bureau of Labor Statistics, 2018). Looking at the unemployment rate is important to ensure companies are able to meet the future demands, while also ensuring the workforce will continue to be stable with healthy wages. According to the Bureau of Labor Statistics, the annual inflation rate in the U.S. is 2 %, which is considered to be a moderate inflation rate. With this information, we can predict that the unemployment rate in the U.S. will remain steady, or continue to decrease, as employers seek to meet demands to keep the workforce stable. We can also project that the inflation rate will continue to increase at about 2 % annually, as this has been the trend for the past 10 years.
How government policies can influence economic growth
There are many ways that government policies and activities can influence the economic growth, but we are going to review just three of these activities. Monetary policies are one of the most common ways to influencing economic growth. Lowering interest rates is one way to do this, as it can reduce the cost of borrowing while encouraging investing. Lower interest rates can also reduce the savings and cause the consumer to spend more. When interest rates are lower on loans, such as mortgage payments, we see that consumers have more disposable income. Investments can also influence economic growth. The government helps to stimulate economic growth by investing in the economy. This can be done by investing in market production, infrastructures, education, and also preventative health care. Another policy that can be used to help with economic growth is the fiscal policy. This policy is useful in the way that it encourages the demand of cutting taxes, while also increasing government spending. With lower income taxes, there is an increase in disposable income, which leads to more spending from consumers. There is a potential issue with this policy though, and that would be that it can lead to the government borrowing more money. This policy works when the economy sees a decrease in private spending while the savings increases, as this leads to an increase in the demand of the economy without the government overspending.
How monetary policy could influence the long-run behavior of price levels, inflation rates, costs, and other real or nominal variables
The monetary policy is used to help with the stabilization of pricing. The monetary policy is set by the Federal Reserve in the United States to control the supply of money produced and contribute to the economic growth and stability of the U.S. (Mankiw, 2015). The government’s goal with this policy is to reach macroeconomic stability by supporting low unemployment, low inflation, economic growth, and stable external payments. The monetary policy can be manipulated, or changed, in order to help a country with ensuring that inflation rates are better controlled. When this is done, they are able to control nominal variables, such as, money supply, the exchange rate, and inflation targets. The central banks have their money supply and interest rates managed by the monetary policy to ensure interest rates are low so that there can be more borrowing, which then will also increase the money supply. Monetary policy can also influence the amount of goods being sold to other countries, as well as, what we are buying from other countries.
How trade deficits or surpluses can influence the growth of productivity and GDP
According to “Investopedia” (2018), “A trade deficit is an economic measure of international trade in which a country’s imports exceeds its exports”. There may be more regulations for imports of foreign trade put in place when a trade deficit occurs. It is also likely that there will be more taxes or tariff amounts placed on foreign items coming from individual countries. There can also be trade surpluses, which occur when there are more goods being exported than imported (Mankiw, 2015). When a surplus occurs, the government is likely to buy more if its treasury shares in order to lower the inflation of the country. The government will also create less money within the economy and push for an increase in purchasing power for households so that the gross domestic product can increase. When there are deficits, the government has to increase a stimulus package in order to put more money into the economy.
Importance of the market for loanable funds and market for foreign-currency exchange
It is essential for countries, especially those investing in foreign countries, to fully understand the market for loanable funds and foreign exchange currency for the country of interest. “The term loanable funds refers to all income that people have chosen to save and lend out, rather than use for their own consumption, and to the amount that investors have chosen to borrow to fund new projects” (Mankiw, 2015, Chapter 13). Banks use deposits made by customers to create loans for people or companies seeking growth. Interest is charged on loans from banks, as this is money that is being borrowed. The real interest rate can affect the rate that money grows, which means that it also has an effect on the inflation rate. When a country is seeking to invest in other countries, it is crucial to compare the interest rates in both their current country and the foreign country so that they are able to borrow money in the country with the best interest rate. There is also the market for foreign-currency exchange, which is where participants will trade U.S. dollars in exchange for foreign currencies. It is common for the United States to loan a large sum of money to a foreign country in order to engage in development activities. The funds that have been loaned to these countries must be paid back with interest, which is used for economic growth of the United States. When it comes to currency, the United States government has strived to preserve a superior dollar. This helps in making sure that foreign bargain is easily achieved, along with making it affordable to import raw materials.
Can the strategic plan be achieved
Given the information above, a strategic plan can be achieved by the government putting certain measures into place. The measures that are required for this would include tariffs, taxes, foreign capital, legislature, and volume limitations. In order for our countries investments on exports to increase, the U.S. government needs to ensure that U.S. treasuries and the U.S. dollar are more valuable in order to attract more investors. This will also help to increase the government’s investments on exports. To ensure the strategic plan can be achieved, it is essential to analyze the current state of the economy, while also predicting the economic state in the years to follow. The capital required has to be available either from savings made by the group or through loanable funds.
As we can see, our economy has recovered well since the recession in 2008. We can see that the GDP is continuing to grow, though it is slowly growing, it is still increasing. Unemployment is at an all time low and is looking as though it is going to continue to decrease as employers are looking to keep the workforce stable for years to come. Inflation is slowly rising and looks like it will continue to do so, but it is at such a moderate rate to where it is not impacting our country to an extreme. We have also seen how monetary policies, investing in the economy, and the fiscal policy can influence economic growth. We also looked at how trade deficit and trade surplus can influence the growth of productivity and GDP. Additionally, we discussed the importance of the market for loanable funds and the market for foreign-exchange currency. Finally, we decided that a strategic plan can be achieved as long as there are certain measures put into place by the government.
Bureau of Labor Statistics. (2013). The U.S. economy to 2022: settling into a new normal. Retrieved from https://www.bls.gov/opub/mlr/2013/article/the-U-S-economy-to-2022-settling-into-a-new-normal.htm
Statista. (2018). Value of personal savings in the United States from 1960 to 2017 (in billion U.S. dollars). Retrieved from https://www.statista.com/statistics/246261/total-personal-savings-in-the-united-states/
Mankiw, N. G. (2015). Principles of Macroeconomics (7th ed.). Retrieved from The University of Phoenix eBook Collection database.
Investopedia. (2018). Retrieved from https://www.investopedia.com/terms/t/trade_deficit.asp