Money and the Prices in the Long-Run and Open Economies

Introduction

In present economic conditions, it is imperative to establish a progressive plan for market growth to correctly forecast the United States’ disposition regarding money, prices, and the open economy. Consequently, the country needs a transparent and reliable plan to gain functional outcomes. To better identify the applicable behavioral impacts, the determinants of monetary policy impacts, the foreign exchange trade deficits must highlight the importance of decision-making, job rates, investments, and market economic growth. To stay away from some of the undesirable outcomes, the United States can stay competitive and uphold equilibrium through a national budget that balanced well produces excesses and stabilizers that work well without any issues. This paper discusses the money, prices in the long run, and open economies.

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Analysis of the History of Changes in GDP, Savings, Investment, Real Interest Rates and Unemployment and Comparison to Forecast for the Next Five Years

The U.S. economy has generally remained in a relatively good condition in the past five years. The economy had some valuable aids from specific utilization outlays, including some exports compensated by unsuitable augmentations. Therefore, according to the Bureau of Economic Analysis, the present GDP position has risen by up to 3.4 percent in the second quarter (U.S. Bureau of Economic Analysis, 2016). Also, history shows that there has been a rise of 3.4 percent in growth since 2009, with the second quarter of the year 2016 having a total gross savings of 3350.3 billion USD (U.S. Bureau of Economic Analysis, 2016). In addition to that, many job reports were striking as non-profit payrolls improved at the slowest pace from September 2010 (U.S. Bureau of Economic Analysis, 2016). With the U.S. per capita GDP placed at sixth position, the country’s status has been maintained by combining typical characteristics that include tax regulation by the government, mortgage lending, increased consumer indebtedness. Each allows the performance of the U.S. to be placed in the top percentile of the best economies globally. The U.S. has experienced marked improvement in some areas, such as in employment. By August 2016, the unemployment rate dropped from 5.1 percent in the previous year to 4.9 percent and by 10 percent in the last five years (U.S. Bureau of Economic Analysis, 2016).

Even though the U.S. economy is regarded as one of the biggest globally, it continues to face diverse challenges on the domestic side and shape the global markets. The U.S. economy alone contributes up to about twenty percent of the world’s economy, which is greater than that of China, the second-largest economy. More than three-quarters of the U.S. economy is based on the service sector, with a key focus on areas such as retail, financial services, and technology. The manufacturing sector also plays a crucial role in the U.S. economy, accounting for a significant portion of the country’s GDP.

How Government Policies Could Influence Economic Growth

Government policies can influence economic growth in several forms. When the administration cuts the interest rates, it reduces the borrowing cost and promotes investing while also supporting consumer spending. Low-interest rates may make consumers save or spend more. When mortgage payments have low-interest rates, consumers tend to have a rise in their disposable income (Pettinger, 2012). One disadvantage of using monetary policy is that reducing the interest rates may distort economic activity in the future. A fall in interest rates may encourage people to take up aspirational mortgages and loans. Therefore, the interest rates need to be cut at the right time so that economic growth is not destabilized in the future.

Apart from the monetary policy, fiscal policy may also influence economic growth. Fiscal policy may encourage the demand to lower the taxes and raise governmental spending. When the government cuts on the income taxes, a rise in the disposable income which the consumers will be willing to spend would be witnessed (Pettinger, 2012). The disadvantage of a fiscal policy is that it may push the government into borrowing more funds. When the government needs additional funds and borrows from the private sector, they may need to increase the taxes. However, when the economy experiences a fall in private spending and a rise in saving, the policy should grow to help encourage the demand in the economy without the government having to overspend.

How Monetary Policy Could Influence the Long-Run Behavior of Price Levels, Inflation Rates, Cost and Other Real or Nominal Variables

One of the most common ways by which governments influence their economy is using fiscal policy. Most of the time, the government will figure out ways to influence economic activity concerning its political aims by using its monetary power to dictate the whole economy’s cash flow supply and availability (Pettinger, 2012). Their main objective is to realize microeconomic stability by allowing low inflation, low unemployment, and equilibrium of external payments. To administer a country’s or an economy’s monetary policy, a central bank is always appointed. The key objective of a monetary policy is to encourage strong economic performance and better living standards of the public in a given economy. Judging the economic functioning of an economy may not be an easy task, but inflation that is low, stable, and foreseeable is an excellent way to judge.

Monetary policy can bring down the interest rates and promote consumers to spend more hence making borrowing more affordable. It will promote both demand and employment, which is referred to as an expansionary monetary policy. The issue with expansionary fiscal policy is that it results in a rise in government borrowing. The private sector lends the government to fund the extra spending arising from the monetary policy. If the economy is experiencing growth, the increased government borrowing may crowd out the private sector (Pettinger, 2012).

The policy is perceived as an excuse to expand the size of the government sector untimely. When a country experiences a sudden decline in private spending and an increase in the saving ratio, then what is referred to as an expansionary fiscal policy may offer a promotion to the demand within the country without bringing about a crowding effect (Pettinger, 2012). The government uses this fiscal policy intending to offset the decline in spending within the private sector.

How Trade Deficits or Surpluses Can Influence the Growth of Productivity and GDP

There is a consensus that the main aim of the Unites States trade policy should be to encourage exports more than imports since increased imports and trade deficits are not good for the economy’s growth and employment (Scott, 1998). Even though according to some economists, trade deficits have no adverse effects on an economy, it has been proven that increased imports and trade deficits have significant effects on an economy. Trade deficits or surpluses have a direct negative impact on the U.S. economy.

Trade deficits or surpluses dictate how an economy controls both its imports and exports. Trade deficits happen when a given economy experiences more imports than exports. Hence, if there are trade deficits, more controls may have to be applied to foreign trade imports. Apart from that, the existing trade agreements may have to be reviewed so that they are honored in the country’s interests (Scott, 1998). Foreign goods coming from particular countries should have high taxes and tariff rates leveled on them. Trade agreements of this kind can be made with the administrators that join with a specific focus on foreign trade.

Another form of trade deficit or surpluses is created when the products exported exceed the imported ones. In such a case, there may be other outputs from the economy. Therefore, the government may have to purchase more treasury shares to bring down the inflation rates in the economy. The consequence of this will be less money within the economy, making households have higher purchasing power and, in turn, setting up new businesses, ultimately growing the country’s GDP. On the other side, the rise in trade deficits has meant losing jobs for many Americans in the manufacturing sector. The loss of jobs was due to the fact that most of the trade the U.S. engages in involves the sale of manufactured products.

Trade deficits may have some adverse effects on wages and salaries in many ways. The jobs lost during the trade fail to increase the rate of unemployment in the long run. Ultimately, the workers who lack jobs in the manufacturing sector join the service industry, which often has lower wages than manufacturing (Scott, 1998). The rise in imports, particularly from the low-wage economies, exerts downward pressure on the wages paid to the U.S. workers. In the end, if the prices of such goods drop, there will be downward pressure on the prices of U.S. domestic firms, forcing them to lower wages or labor costs (Scott, 1998).

Deficits may force the government to come up with more stimulus package and pump more funds into the economy to fill the gaps and promote the effectiveness and efficiency of the local companies to borrow and enhance productivity. In the U.S., for instance, yet it has not been the usual case in the past five years, and it does not seem like it will be an issue even five years from now. Therefore, firms operating in the U.S., particularly in the transportation industry, are more likely to suffer from a lack of increased productivity and efficiency.

The Importance of the Market for Loanable Funds and the Market for Foreign Currency Exchange to the Achievement of Strategic Plan

A market of loanable funds needs both borrowers in need of funds and lenders giving out the needed funds. The significance of the loanable funds market is the interest rate-determining factor, the price of loans. There will be a demand for more loans when the real interest rates are lower, and in periods of high real interest rates, the loans are low. In other words, the market for loanable funds refers to how a financial system is perceived. Most of the time, people save with a concern in the market for loanable funds to deposit their savings.

If an economy experiences a trade deficit, there is a need for financing on the purchase of the goods, which is achieved by selling the assets abroad. It means that the foreign capital would be coming to the country. To purchase the domestic assets, the public ought to change money to U.S. dollars. The result of changing the money is a rise in the demand for the U.S. dollars, and should there be surplus foreign currency earned from the transaction, it is used to buy products from abroad. It ultimately results in an increase in the domestic capital within the country.

Recommendation

An economy’s net exports increase when there are trade restrictions. It leads to a rise in the U.S. dollar amounts from the foreign currency exchanges. The effect is that the products from the local markets become more expensive while those from the foreign markets become more affordable. It cancels the initial impact of the trade restrictions put on the exports. There would be a significant impact on the investor should they change their perceptions of having assets of the country and its consequences on the country’s economy. The U.S. has the capacity to come up with plans and policies that will enable the country to address the trade problems now effectively and in the future should an economic crisis strike. An effective structure plan can be achieved through a consensus on the preferred future directions of trade for the world’s biggest economy. Maintaining the past trade policies is not a viable option for the economy anymore.

 

References

Pettinger, T. (2012). Policies for economic growth. http://www.economicshelp.org/blog/5272/economics/policies-for-economic-growth/

Scott, R. E. (1998). U.S. trade deficits: Causes, consequences and policy implications. http://www.epi.org/publication/trade-deficits-consequences-policy-implications/

U.S. Bureau of Economic Analysis. (2016). Current-dollar and “real” gross domestic product. http://www.bea.gov/national/index.htm