Description
Week 3 will help students develop an understanding of what money is, what forms money takes, how the banking system helps create money, and how the Federal Reserve controls the quantity of money. Students will learn how the quantity of money affects inflation and interest rates in the long run, and production and employment in the short run. Students will find that, in the long run, there is a strong relationship between the growth rate of money and inflation. Students will review the basic concepts macroeconomists use to study open economies and will address why a nation's net exports must equal its net capital outflow. Students will demonstrate the relationship between the prices and quantities in the market for loanable funds and the prices and quantities in the market for foreign-currency exchange. Student will learn to analyze the impact of a variety of government policies on an economy's exchange rate and trade balance.
Develop a 2,100-word economic outlook forecast that includes the following:
- Analyze 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.
- Analyze how monetary policy could influence the long-run behavior of price levels, inflation rates, costs, and other real or nominal variables.
- 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.
- Recommend, based on your above findings, whether the strategic plan can be achieved and provide support.
Use a minimum of three peer-reviewed sources from the University Library.
Format your paper consistent with APA guidelines.
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MONEY AND THE PRICES IN THE LONG RUN AND OPEN ECONOMIES
Money and the Prices in the Long Run and Open Economies
Student’s Name
Course Name and Number
Instructor
Institutional Affiliation
Date
1
MONEY AND THE PRICES IN THE LONG RUN AND OPEN ECONOMIES
2
Money and the Prices in the Long Run and Open Economies
Introduction
Economic growth is dependent on the extent to which money circulates freely in an
economic set up. This includes the availability of loanable funds to finance new projects and
support an aggressive growth. In this analysis, the focus will be examining the changes in GDP,
savings, investments, real interest rates and unemployment in the United States. Based on these
aspects, the analysis will identify whether it will be possible to achieve the goals of the strategic
plan of an aggressive growth plan, investments and productivity. The analysis will determine
how government policies influence economic growth and how monetary policies include the
long run behavior of price levels, inflation and costs. The analysis shall also examine how trade
deficits and surpluses influence growth of productivity and GDP besides an examination of the
importance of loanable funds and foreign currency exchange in the achievement of the strategic
plan objectives.
Changes in GDP, Savings, investment, real interest rate and unemployment in US
2011
2012
2013
2014
2015
GDP (USD bn) 15,518
16,155
16,663
17,348
17,947
Savings (%)
5.8
5.60
4.65
5
5.7
Investment
6.4
9.8
4.2
5.3
4.0
1.2
1.4
1.7
5.25
2.24
Unemployment 8.9
8.1
7.4
6.2
5.3
(Annual
change in %)
Real interest
rate (%)
Source: U.S. Economic Outlook, 2016
MONEY AND THE PRICES IN THE LONG RUN AND OPEN ECONOMIES
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In relation to the table above, it is clear that the Gross Domestic Product (GDP) of the
United States improved each year for the last five years beginning the year 2011. The
improvement in the GDP indicates a growing economy and increasing national output. In terms
of savings, the figures fluctuated over the years with the largest amount of savings in the
economy being witnessed in the year 2011 and the lowest in 2013. Also, the level of investments
in the economy fluctuated over the last five years with the highest level of savings in the
economy being recorded in 2012 and the lowest investments level being recorded in the year
2013. Interest rate in the economy fluctuated over the years with the year 2014 recording the
highest real interest rate at 5.25 while the year 2011 had the lowest interest rate at 1.2. However,
the economy experienced a reduction in the level of unemployment over the years as the rate
dropped from the highest level of 8.9 percent in 2011 to 5.3 in 2015.
How Government Policies Influence Economic Growth
Indeed, government policies influence the level of economic growth through various
ways. First, government policies such as reduction on interest rates, taxation rates and
government grants tends to increase the money in circulation in the economy (Pettinger, 2012).
This enables more people to consumer goods and services in the country thus spurring economic
growth. Higher government spending also helps to increase consumption and number of jobs in
the economy thus spurring economic growth. Secondly, government policies have a major
impact on the growth of businesses and investments. Policies such as those that provide tax
subsidies, tax havens and reduction of corporate tax rates helps to shield the businesses from
harsh macro-economic environment that hinder their growth. A favorable businesses
environment in turn helps businesses grow and boast growth of the economy. Additionally,
government policies such as those that target at privatizing and deregulating industries allows
MONEY AND THE PRICES IN THE LONG RUN AND OPEN ECONOMIES
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private investors to assume control of firms and improve efficiency which contributes to greater
performance of those companies and the general economy.
Influence of Monetary policy on Price levels, Inflation, costs and other variables
Monetary policy has an influence on price levels and inflation by determining the amount
of money in circulation in the economy (Pettinger, 2012). Monetary policies may be achieved by
the use of three tools which include open market operation, reserve requirements and discount
rates. These tools have a great effect on interest rate, inflation rate and the overall price levels.
That is, open market operations such as sale of government bonds to the public is itself
contractionary and aims to reduce the money circulating in the economy. This tends to lower the
level of inflation in the economy and a reduction in the overall price levels. Similarly, increase in
reserve requirements and discount rates tend to lower money in circulation in the economy thus
helping to influence the price levels and lower inflation. The reverse for lowering the reserve
requirements and discount rates helps to raise the price levels in the economy as it increases the
amount of money in circulation. Therefore monetary policies influences price levels, costs and
other real and nominal variables by determining the amount of money that is circulating in the
economy.
How Trade Deficits or Surpluses can Influence Growth of Productivity and GDP
Basically, trade deficits occur when the amount and value of a country’s imports are
lower than the level of exports. On the other hand, trade surpluses occur when the amount and
value of exports of country exceeds its level of imports. Ideally, trade deficits influence the
growth of productivity and the GDP levels in that a high level of deficits means that the US
demands for certain goods and services is being satisfied by the imports from other countries
MONEY AND THE PRICES IN THE LONG RUN AND OPEN ECONOMIES
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rather than the local firms (Griswold, 2007). This means that high trade deficits may lead to
lowered productivity as well as GDP since imports are subtracted when determining the GDP.
That is, trade deficits...
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