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Money and the Prices in the Long Run and Open Economies
Name
Institution Affiliation
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The history of changes in GDP, savings, investment, real interest rates, and unemployment
The United States economy faces a lot of challenges, both domestic and in the
international market. The US economy is substantially the largest despite the challenges it faces.
Twenty percent of the world economy can be attributed to the United States, a figure that is
significantly larger than that of China which is the second largest economy in the world. Almost
80% of the U.S economy is attributed to the service sector, whether the financial sector, health
sector, among others. The manufacturing industry has also played a great part in promoting the
economy and competent legal sector as well as a stable political system brings sanity to the US
economy. However, a chain of housing crises, income inequalities, wage stagnation and budget
The United States Gross Domestic Product (GDP) has averaged a growth rate of 3.22
percent from 1947 to 2017. It was at its highest in the first quarter of 1950 at 16.90 percent and
lowest at the first quarter of 1958 at -10%. The GDP growth rate of the US economy is expected
to be two percent and 2.1% in the next one year. IN the long term the GDP growth rate is
expected to trend around 2.00% in the next five years. As at July 2017, the saving rates were at
3.50 percent, and historically, the rates of savings have averaged a rate of 8.31 percent, with the
highest recorded at 17% in May 1975 and lowest at 1.90% in July 2005 (U.S. Bureau of
Economic Analysis, 2017). In the long term, the saving rates are expected to trend around 4.60
The real interest rates in the United States were 1.25 percent in July 2017. Historically,
the real interest rates have averaged 5.78 percent from 1971 until 2017 with the highest rate of 20
percent recorded in March of 1980 and lowest of 0.25 percent in December of 2008. The rate is
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expected to remain at a constant figure of 1.25 percent in the twelve months and the projected
trend in five years’ time is expected to be 2.25 percent. The unemployment rates in the United
States unexpectedly rose from 4.3 percent in July 2017 to 4.4 percent in August this year, and
this implicates that the unemployed persons increased by 151 in one month to reach 7.1 million.
Since 1948, the rates of unemployment have averaged 5.80 percent with the highest recorded rate
of 10.80 percent recorded in November of 1982 and lowest rate of 2.50 percent in May of 1953.
By the end of this quarter, the unemployment rates in the United States are expected to remain at
4.40 percent and increase to 4.60 in 12 months’ time (U.S. Bureau of Economic Analysis, 2017).
In the long term, the trend is expected to sour, and this can be associated with the prevailing
adverse economic challenges. The situation is expected to raise the level of unemployment to
Government policies influence economic growth in various ways, either through the use
of the monetary policy or the use of the fiscal policy. The government, through the monetary
policy, exercises its authority through the use of the Federal Reserve which is the central bank
that manages liquidity to sustain the United States economy. The monetary policy is the most
common tool that the government uses to instigate economic growth. If the Federal Reserve
lowers interest rates charged by banks and other financial institutions, it will, in turn, reduce the
cost of borrowing. People will be encouraged to borrow for investment purposes. Also, it will
encourage consumer spending. Low-interest rates have the potential of discouraging the
consumers to save, and instead, they spend more (Barro & Salai, 2014). It becomes even
instrumental when interest rates charged on mortgage payment are lowered because it leads to an
Fiscal policy is the other policy that can be used by the government to influence
economic growth. The fiscal policy revolves around taxes and government spending. In this case,
the government cut down taxes and increases its expenditure. If the government lowers taxes on
incomes, people will have more disposable income which they will spend. On the other hand, if
the government increases its expenditure, it will contribute to the creation of more jobs ad with
more employment; the economy will realize a significant growth (Barro & Salai, 2014).
case where the government wants to borrow more money from the private sector, in the long-run,
it will have to raise taxes. Therefore, if the private spending in an economy decreases and
savings increase, an expansionary fiscal measure should be put in place to boost the economy
The government can stimulate the economy through investing in it. Such investments
may revolve around education, preventative healthcare, infrastructure, and market production.
Stimulation of economic growth involves the creation of jobs and lifting of stagnant wages in the
economy which in turn calls for public investments like education. These public investments are
a perfect avenue of any pro-growth budget which aims at addressing inconsistent, full
employment, slow economic growth and stagnant wages prevailing in the economy.
Furthermore, such public investments try to address economic inequality which has a negative
Monetary policy’s influence on the long-run behavior of price levels, inflation rates, costs,
government’s monetary authority. In the United States, the central monetary authority is the
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Federal Reserve which has the mandate of controlling the money supply in the economy as well
as instigating economic growth and stability, lower the unemployment rates, and use the trade
markets to maintain proper exchange rates with foreign countries (Mankiw, 2017). Monetary
policy doesn’t affect growth in the long-run, but poor monetary policies result to inflation. The
high and varying inflation is responsible for impeding economic growth in some ways. First, the
varying and high inflation tampers with the capability of relative prices to provide the correct
signals for guiding the allocation and the use of resources for their highest value. However, if the
inflation causes a simultaneous and uniform rise in prices, then it wouldn’t have any effect on
relative prices and the demand and supply patterns would not be affected.
The other way in which a poor monetary policy limits the performance of the economy is
through encouraging wasteful spending of resources by the people. The usually spend in such a
manner because they are afraid to hold money. It is clear that inflation is a bad instrument for
saving because the longer you hold out your money; the more it loses its value (Mankiw, 2017).
People, therefore, prefer to keep their money holdings as low as they can and therefore they will
at all times make frequent and smaller withdrawals from their bank accounts. Such
economization replicates to the lost opportunity because such money could have been spent on
How trade deficits or surpluses can influence the growth of productivity and GDP.
Trade deficits and surpluses are some of the components of a country’s Gross Domestic
Product (GDP). Trade deficits and surpluses revolve around the regulation of exports and
imports in the economy. A country’s GDP increases when the total value of goods and services
produced domestically sold in the foreign market exceeds the total amount of goods and services
produced and sold in the domestic market by foreign producers. It simply means that a trade
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deficit is realized when imports exceed the exports while a trade surplus usually occurs when
exports exceed imports. The balance of trade has the potential of influencing the growth of
productivity and the GDP. Such a scenario occurs when barriers to trade, fiscal policy, factors
endowments and productivity, and investment activities in a country directly affect international
Once the determinants of economic growth are accounted for, trade imbalances have an
insignificant effect on the economic growth rates. Over time, a country’s lending or borrowing
profile is reflected in the trade deficits or surpluses. Countries have similarities to companies in
that they borrow capital to finance purchases and investments. Trade deficits are an indication of
a weak economy whereas surpluses indicate otherwise but not in the long run. In any way, trade
deficits and surpluses are important elements in the efficient allocation of economic resources
and international risk sharing. Such an obligation is necessary for promoting the long-run health
Creation of trade deficits leads to more regulations on imports. In such a case, more
tariffs and import taxes are imposed by individual countries, and the United States can adjust
these regulations as it likes in accordance to what a new administration desires. Surpluses, on the
other hand, cause the U.S treasury to buy more of its treasury shares and lower inflation. Also, it
will instigate an increase the country's GDP by creating less money in the economy and
empower households for purchase purposes (Mankiw, 2017). The deficits are the ones that hurt
the economy which may even force the U.S government to inject money into the economy to
increase the effectiveness of companies to borrow and increase productivity in the economy.
The importance of the market for loanable funds and the market for foreign-currency
exchange
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The market for loanable funds is made up of lenders and borrowers who give out the
funds and demand the funds respectively. Countries determined to invest in foreign countries
have to understand the market of loanable funds and foreign exchange in their country of
interest. The real interest rates usually rely on loanable funds. Banks usually create loans out of
deposits made clients and the real interest rate affect the rate of money growth and subsequent
inflation. A country, therefore, has to consider the interest rates in both the home country and the
foreign country and always attempt to borrow from a country with the lowest interest rates.
The United States is known for lending money to other countries for developmental
purposes. However, these loans are expected to be repaid, and the interest attached to these loans
boost the economic growth in the United States (Choudhri, Hakura & International Monetary
Fund, 2015). If the country experiences an increased economic growth, firms in such a nation
On the other hand, the foreign exchange market affects a country’s purchasing power as
well as international and national credit. Also, a country is only able to reduce its foreign
currency risks and minimize its debts through the use of the foreign market. The United States is
always determined and has put various measures to make sure that the dollar is superior to other
currencies. Such a move ensures that United States companies operating in foreign countries can
easily achieve a foreign bargain (Choudhri, Hakura & International Monetary Fund, 2015). Also,
it ensures that the companies can import raw materials at an affordable cost and therefore they
continue to remain productive in foreign countries. Therefore, it helps the firms to achieve their
Trade restrictions lead to an increase in net exports. When this happens, there is an
increase in the amounts of dollars in the foreign currency exchange. As a result, goods from the
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local market become expensive whereas foreign goods become cheap. The result is offsetting of
Recommendations
A strategic plan can be achieved, but for practicability purposes, it can only be achieved
when the government puts in place various measures. The Federal government has to put in
measure various measures in related to tariffs, taxes, and volume limitations. Also, capital
control measures must be put in place if a strategic plan is to be achieved. Increasing the net
investments on exports requires the government to come up with a plan which makes the U.S
treasures and the U.S currency attractive to foreign investors and lure them to purchase. If such
measures are put in place, and company with a strategic plan that wishes to expand and venture
As foreign investors continue purchasing the U.S dollar as well as the U.S treasuries, this
monetary policy tends to lessen, and interest rates reduce. High returns on the dollar and the
securities attract more investors in the United States (Wang, 2013). Considering the current
trends on global financial; integration, the U.S can purchase a substantial amount of assets to
raise the capital inflow and keep the dollar superior compared to other currencies. The federal
government can also uphold certain measures to effectively devalue the dollar against key
References
Barro, R. J., & Salai, X. (2014). Economic growth. Cambridge, Mass: MIT Press.
Choudhri, E. U., Hakura, D. S., & International Monetary Fund. (2015). The exchange rate pass-
through to import and export prices: The role of nominal rigidities and currency choice.
https://www.bea.gov/
Wang, J. C., (2013). Loanable funds, risk, bank service output. Boston, Mass.: Federal Reserve
Bank of Boston.