Money and Prices In the Long Run and Open Economic essay

Moneyand Prices In the Long Run and Open Economic

  1. Analyze the History Of Changes in GDP, Savings, Investment, Real Interest Rates, and Unemployment and Compare to Forecast for the Next Five Years.

TheUnited States economy grew every year at rate of 0.8 percent for eachquarter in the initial three months of the year 2016. According tothe second forecast released by the Bureau of Economic Analysis, thiswas seen as better compared to the 0.5 percent upsurge initiallyanticipated. Consumption constantly boosted growth while spending onhome construction increased drastically more than expected. Thehindrance from the inventories and trade was smaller. However,business investment drastically fell than expected recording firstquarter growth the lowest in the year. In 1947 to 2016, the meangrowth rate for gross domestic product stood at 3.23 percent,attaining an outstanding high of 16.90 percent in the initial quarterof 1950 as well as records low of -10 percent in the initial quarterof 1958 (Mishkin, 2007).

Alook at the household savings in the U.S. remained stagnant at 5.40percent from March to April of 2016. Individual savings in the U.S.averaged 8.34 percent since 1959 to 2016. The record is 17 percentoutstanding in May 1975 in contrast with 1.90 records of July 2005,which was low. In the U.S., individual saving rate is commensuratewith the ratio of individual income saved to individual netdisposable income at a certain given time.

TheU.S. is the largest investor abroad. The US remains as one of themajor recipients of direct investments globally. Most of thecompanies are known to invest abroad, and this kind of behavior islargely attributed to the urge of the companies to evade the presenceof labor unions as well as the relatively higher wages and salariesthat the companies are expected to pay. Notably, the share ofinvestments that goes to the third world countries has been ondeclining trend, something that has been of great worry to many.According to the majority of economists, having direct investmentsabroad does not necessarily imply that jobs will be fewer and thewages lower. Notably, the opposite is the case. However, most of theemployments that are lost in the different manufacturing companies inthe United States over the past years is an indicator thatrestructuring needs to be done in the industries to respond to thedomestic forces.

UnitedStates interest rates have been low since 2008. The low-interestrates have mainly been due to the negative effects of the recession.Interest rates fell. Though it is anticipated that how much of thedecline will take. A deterioration in the trend component of realinterest rates across the years is a continuation of thedeterioration that started years before.

TheUnited States long-term unemployment was historically recorded at thetime of Great Recession period between 2007 and 2009. This number ofindividuals who were unemployed drastically reduced over long-termeven after the end of the recession. Due to the cyclical trend,long-term unemployment has declined in the later years, but remainshigh by historical standards. Even after the five years of GreatRecession, the population of the long-term unemployed still composeda larger share of the unemployed compared to during any pastrecession.

  1. Discuss How Government Policies Can Influence Economic Growth

Governmentpolicies can influence economic growth through fiscal policies andincome tax. Several annual data have been analyzed to examine theinfluence of government policy variables at both the local and statelevels (Easterly &amp Rebelo, 1993). The state fiscal policies havebeen identified as having a measurable link between per capita incomegrowths. However, it is not usually in the anticipated direction andrarely in a way that is robust to alternative specifications. On theother hand, tax effects on nation’s economic growth are somewhatvariable. Nonetheless, the expenditure effects are more consistentthroughout diverse specifications. The statistically important linkbetween the state as well as state plus cumulative local tax revenuesand the economic growth is sensitive to the regressor set and theperiod of examination. Usually, there is highly important correlationmeasured between the variables and the per capita income growth.However, more work is required to be done to determine what theresults mean.

  1. Analyze how monetary policy could influence the long-run behavior of price levels, inflation rates, costs, and other real or nominal variables.

Forany price level, the aggregate-demand curve indicates the totalquantity of any goods and services in demand in the economy. Hence,the aggregate-demand curve has to slope downwards for the wealtheffect, that is, a lower price level will raise the real value of thehousehold’s money components, hence higher real wealth provokesconsumer spending. Secondly, there is the interest rate impact(McCallum &amp Nelson, 1997). In this aspect, a lower price levelplays a role in lowering the interest rate as individuals tend tolend out their disposable money holdings hence the lower interestrates provokes investment spending. Third aspect is the exchange-rateimpact. When a lower level of price lowers interest rates, investorsmove part of their finances abroad and cause the local currency todepreciate in relation to the foreign currencies. The depreciationallows the local goods to be cheaper when compared to the foreigngoods hence promotes spending on net exports. The three effects takeplace simultaneously in an attempt to increase the quantity of goodsand services in demand when the price levels depreciate as well asdecreasing it when the price levels rise.

Theextent to which public perceptions regarding the monetary authority’sobjective on the long-run inflation fluctuates has significanteffects on the monetary policy. The cost of disinflation in severalsmall, as well as large macro-economic models is based on the extentto which the long-run inflation anticipations move in reaction topolicy actions. Several studies have stressed the potentialsignificance of shifts in the long-run inflation anticipations forthe behavior of the period structure of interest rate.

  1. Describe how trade deficits or surpluses can influence the growth of productivity and GDP.

Thequestion will mainly concentrate on the manner in which tradedeficits influences the growth and productivity and GDP. Often, tradedeficit is caused by changes in the national savings or investmentsas well as both. The U.S national saving started depreciating in the1950s and the depreciation further increased in the 1980s. Bothindividual savings and the federal saving went down during theperiod. In this widening trade deficit, we see a growing UnitedStates budget deficit taking center stage due to the twin deficithypothesis, which proclaims that trade deficits are caused, by budgetdeficits. However, to understand the United States account deficit,one must be keen on a combination of the various forces, which havedeveloped a significant increase in the international supply ofsaving. The understanding assists in the explanation of the U.S.current account deficit as well as the relatively low level oflong-term real interest rates. Also important on how trade deficitsor surplus affect the growth of productivity and GDP is the increasein the labor productivity experienced in the U.S. from as early as1996. It explains the widening of the United States trade balance.Therefore, an increase in productivity has the potential to increaseboth the rates of investment as well as lower the rates of saving.Hence, the effect is a wider current account deficit.

  1. Discuss the importance of the market for loanable funds and the market for foreign-currency exchange to the achievement of the strategic plan.

  1. The market for loanable funds

Themarket for loanable funds is important in the view of financialsystem. It brings together all savers to the market for the loanablefunds so that they deposit their savings. In addition, any person inneed of a loan either to invest it or to spend it comes to the marketfor loanable funds.

Belowis a summary of how the loanable funds work:

S= I + NCO


S= Savings

I= Domestic investment

NCO= Net Capital Outflows

Savingsideally refers to every other item that an economy can save from itsincome. The savings in this sense is two-fold and entails bothsavings at government and the private sector. Through the savings,there is a reflection of the national level of expenditures. Theother part of the identity has the national investments and the netcapital outflows. This then means that on one side there are thesavings that are supplied to the market while on the other side thereis money, which is demanded. The money demanded is meant for foreigninvestment and national investments. As shown in the diagram above,the level of equilibrium is reached when the savings quantity thatmatches the supply of the loanable funds is equal to the amount ofinvestments and the net capital outflows, which refer to the demandfor the loanable funds. From the figure, the curve for supplyloanable funds ideally slopes upwards. The sloping upwards isattributed to the relatively higher real interest rates, which arisefrom the higher return a person gets from loaning out their money. Onthe other hand, the demand curve for the loanable funds slopesdownwards. This happens mainly because as the rate of real interestrates rises, the price for an individual ton pay the loan also rises.

  1. The market for foreign currency exchange

Inorder to understand the market for the foreign currency exchange agraphical representation and equations will be used. Foreign currencyexchange market is that place where the local or the domesticcurrency is exchanged for the foreign currencies. The identity isprovided as shown below.



NX= Net exports

NCO= Net Capital Outflows

Forthe economies that run on trade deficit where NX is less than zero(0), there are high chances of it financing the net purchase of thegoods and services by selling assets abroad. This then means thatforeign capital gets into the economy as represented by NCO&lt0.

Forthe foreign economies, they have to exchange their currencies intoeuros. Upon changing the currencies the demand for euros increaseshence, they can buy the assets.

Inthe event, the country is operating on a trade surplus, representedby NX&gtzero. This means that any form of surplus by the countryarising from the foreign currency is used in the purchase of assetsoverseas.Therefore, domestic capital is got out of the economy.Arising from this kind of situation, residents get themselves in asituation where they have to exchange their euros for foreigncurrency hence increasing the supply of the money. This then meansthat equilibrium is determined by the real exchange rate. Given thatequilibrium matches the relative price of both the foreign and local,the effect is felt on the net exports. The money supply as indicatedin the graphical representation is represented by a vertical curve.This happens given that it is independent of the real exchange rate.

  1. Recommend, based on your above findings, whether the strategic plan can be achieved and provide support. &nbsp &nbsp&nbsp

Basedon the analysis of the history of changes in GDP, savings,investment, real interest rates, and unemployment and compared to theforecast for the next five years, it is evident that strategic plancan be achieved. The household savings in the U.S. remained stagnantat 5.40 percent from March to April of 2016, an aspect that will helpin the facilitation of the strategic plan. Achieving strategic planmeans that most of the open economies have to invest progressivelyoutside US OR United Kingdom. The US remains as one of the majorrecipients of direct investments globally. Most of the companies areknown to invest abroad, and this kind of behavior is largelyattributed to the urge of the companies to evade the presence oflabor unions as well as the relatively higher wages and salaries thatthe companies are expected to pay. Notably, the share of investmentsthat goes to the third world countries has been on declining trend,something that has been of great worry to many.

Inorder to achieve the strategic plan, the importance of the market forloanable funds and the market for foreign-currency exchange cannot beunderestimated. In any form of market, financial system is necessary.The market for loanable funds is important in the view of financialsystem. It brings together all savers to the market for the loanablefunds so that they deposit their savings. In addition, any person inneed of a loan either to invest it or to spend it comes to the marketfor loanable funds.


Easterly,W., &amp Rebelo, S. (1993). Fiscal policy and economic growth.Journalof monetary economics,32(3),417-458.

McCallum,B. T., &amp Nelson, E. (1997). Anoptimizing IS-LM specification for monetary policy and business cycleanalysis(No. w5875). National Bureau of Economic Research.

Mishkin,F. S. (2007). Theeconomics of money, banking, and financial markets.Pearson education.