Money and the Prices in the Long Run and Open Economies
Moneyand the Prices in the Long Run and Open Economies
Inthe current economy, it appears authoritative to generate aprogressive marketplace plan to suitably forecast the American Statesdisposition in regards to money, prices and economies in the longrun. Therefore, it is vital that the plan has transparency andconsistency to have useful results. To better recognize the relevantbehavioral impacts, determinants that affect financial policy, tradeshortfalls as well as foreign exchange should be considered. Forinstance, one must emphasize the implication of investments,employment rates, market growth and decision making. Evading unwantedresults, the American States can remain modest and maintainsteadiness through a well-adjusted national budget that generatesexcesses and operates without a problem. Thus, this paper willprovide an overall five-year stand on the long-run effects of money,prices and open economies.
TheHistory of Variations in GDP, Savings, Investment, Real InterestRates, and Unemployment Compared to Forecast for the Next Five Years
Thestatus of the U.S economy has been comparatively good in a good statebesides an increase in the Institute for Supply Management Index(ISM)has been positive in past five years. There has existed valuablesupport from particular utilization outlays and exports that weremoderately balanced by unattractive growths. Consequently, thecurrent GDP position has increased by 3.4 percent $154.9 billiondollars in the subsequent part to a rate of 18,357.5 billion dollars.The history specifies that there has been an increase in growth sincethe year 2009 of 3.4 percent. According to The U.S. Bureau ofEconomic Analysis (2016), the total gross saving for the Federalgovernment was 3350.3 billion dollars for the subsequent part of2016. Moreover, abundant jobs reports were protruding as non-profitemployees improved at the weakest step since September 2010(Packenham & Robert, 2015).
Statisticsindicate regarding per capita GDP that the Federal is the sixthhighest. The Federal government five-year status has been preservedthrough a combination of distinctive characteristics that consist oflow-interest rates mortgage lending, excessive risk taking in thecommercial division, raised consumer indebtedness and government taxregulation which has allowed the U.S performance to be at the top ofthe best global economies. As of August 2016, there has been areduction in the unemployment rate to 4.9% equated to the precedingyear which was 5.1% and the last five years at 10%. Though it wouldbe permissible for Apple Company Inc., to export its product to Iran,sanctions against Iranian financial institutions stop the transfer ofresources in or out of Iran (Faucon, 2014). Therefore, Apple CompanyInc. should pursue business investments with an alternative countrywhere FTA’s are currently in place for foreign market investment ofour products.
HowGovernment Procedures Impact Economic Development
TheFederal government has the mandate to employ various policies for thesake of economic growth. First, the U.S government uses monetarypolicy to manipulate economic growth. In this case, the Central Bankcan reduce the interest rates lower interest rates shrink the priceof loaning, promoting investments and customer expenditure. Lowerinterest rates as well cut the incentives to save making spendingattractive. At lower interest rates there is a reduction in mortgageinterest payments that increases disposable income for the consumer.Second, the U.S. administration can improve its economy by reducingtax and increasing government expenditure thus lesser revenue taxwill rise nonrefundable income and encourage customer spending.Equally, higher state spending will generate more employmentopportunities and afford an economic incentive. Third, the governmentuses devaluation policy to develop attractiveness and support localdemand hence a reduction in exchange rates makes exports discountedand imports costly. The government can also regulate its labormarkets that discourage many firms from employing workers thusproviding a long-term boost to investment. Lastly, the U.S.government increases the supply of money and purchasing bonds tomaintain bonds at a low rate. It is believed that when the supply ofmoney is increased and the interest rates are low will boostinvestment and fiscal development.
Investigationon How Monetary Policy Affect the Long-Run Behavior of Price Rates,Inflation, Costs, and Other Real Variables
Monetarypolicy is the policy set by a government’s monetary control. Forinstance, the Federal Reserve in the United States controls thesupply of money in the market and contributes to the economic growthand equilibrium of a state. Monetary policy can be influenced andchanged to help a country and out of the long- run, they must ensurethat inflation rates are controlled favorably. By doing this nominalvariable that affects Monetary Policy is concentrated on consumption,trade, monetary demand, parity of purchasing power, exports and tradeshortfalls, jobs, exchange rates, savings, regulatory constraints andits current account. All these illustrates the short and long runcoincided with the monetary economy behavior.
TheFederal government has expanded its monetary policies to include notonly holding the interest rates at the lower bound but also thecurrent situation where the government is buying large track offsetsto increase rates. The FOMC outlines the national fund rate at alevel it thinks will improve fiscal situation that is constant forattaining its monetary policy goals and it regulates targets based onevolving economic growth.
Thesteps that were taken by the government to achieve stability as wellregulate the increasing demand has allowed an inflow of financialsubsistence to the market. These measures have resulted in loweringinterest rates, foreign exchange dollar value and stock prices thatare arresting customer wealth and business spending decisions(Monetary Policy and The Economy). Variables such as money demand aredependent on real activities such that purchasing power is dependenton a single traded good deprived of barriers to international trade.
Further,factors that are connected to interest rates combined with the minorexchange values of the U.S dollar and stock market price will resultin stimulated spending and demand rates. According to the FederalReserve another factor of monetary policy related to the economyinterest equality is free capital mobility. Additionally, revenuesfrom taxes, money creation and assets of foreign currency bonds areinfluential in the budget restraints of the government fundingpurchases due to international interest rates they must pay. Actionstaken by the government are the efforts to avoid decreasing itscapacity to issue government debt and rely on the reproduction ofadditional money to fund the country’ s economic deficits (MonetaryPolicy and The Economy, n.d).
Previouspenalties of continual growth in commerce shortfalls have causedprice reduction of various commodities, job loss and a deteriorationin the manufacturing of goods within the Federal government that ledto the growing trade discrepancies during 1979 to 1994. Moreover, thecost of living has significantly reduced a number of people aremoving towards a standard living level. In fact, the level ofemployment has increased due to the development of many manufacturingindustries that are offering job opportunities.
HowTrade Shortfalls or Surpluses Can Impact the Development ofProductivity and GDP
TheU.S. has an open economy policy when it comes to trading globally.Trading is vital in the Gross Domestic Product (GDP) of any countrybecause it enables the state have a great productivity and aneconomic growth. When the GDP of a given country is bad, it is anindication that the country does not have good productivity andgrowth. If the net exports are huge in the GDP, then good tradingrelations with other countries exist especially if a country has anopen economy policy when it comes to trade. Having the openness toglobal commerce also allows a country to grow economically.
TheFederal government steadiness of trade is very conducive as theoverall exports are in greater quantity as equated to the country’simports. The United States has the highest number of manufacturingand technological industries that produce million tons of products.In this case, developing countries import such as African and Asianstates only rely on industrial products from the U.S. African andAsian countries import these goods from united states hence theFederal government earns considerable foreign exchange since thesecountries cannot even export a quarter of their imports from theUnited States.
Likewise,the downside to commerce shortfalls come in the form of lost jobs inmanufacturing sector due to the growth in imports and weak exports ofgoods. Commerce shortfalls also affect U.S. wages that causedisparity in income when companies invest in foreign countries. Wagesuppression and price decrease of domestic products by initiativesalso diminish the bargaining power of international firms. Also, theprevious mention of negative aspects and trade deficits weakenproductivity when research and development. Economic research hasalso indicated that excessive national venture over reserves shouldbe supported through the influx of foreign capital and coordinated bya balanced shortfall of the United States current account. Obligationissues also directly affect the Federal government ability to remainmodest in commerce for an extended period.
TheSignificance of the Market for Loanable Funds and the Market forForeign-Currency Exchange to the Attainment of the Strategic design
Themarket for loanable funds comprises of borrowers who are in demand offinance and lenders who provide the funds. The significance of theloanable finances markets will be the determinant aspect for the realinterest rates that refers to the price of loans. More loans aredemanded when there are low-interest rates and when the interest rateare increased the loans demanded are less. Therefore, the market forloanable funds shows how the financial system is viewed.
Incase an economy runs trade shortfalls, there must be a funding on thepurchase of commodities. This is done by selling assets abroad, meansthat the foreign capital is coming to the country. In order to buydomestic assets, the citizens from the other economies shouldexchange their money in U.S dollars and this results in the increasein the power of the U.S. dollar. Similarly, if there is excessforeign currency gained in this transaction, it is used to purchasegoods from foreign countries and for this reason the domestic capitalincreases in the country.
Tounderstand the interpretation of loanable funds, a significantvariable has been illustrated as follows. Loanable Funds(LF)approach the stability interest compares the amount supplied of LF,which consist of savings with the capacity demanded by Loanable Fundand this consist of ventures and funded state shortfall. On the otherhand, interest in regard to loanable funds is the connection amonggovernmental borrowing and interests rate determination on theimmediate run with the incorporation of capital that flows into thesupply and demand. The market stability is based on what may isdefined if either market commodities or money is at a steady output.
Nevertheless,when the market economy is not in balance, the interest rate can wipeout either the cash market or the Loanable Funds that cannotconcurrently clear both markets. Though the foreign exchange marketis correlated to the money market itself, it is a single market thataffords purchasing power, international credit and changes in financefor state currency.
Moreover,the foreign currency exchange also provides the clearing of arrears,payments of government borrowing and reducing risks related toforeign currencies. The Federal government has loaned a large amountof money to a foreign state to carry out developmental activities.These funds must be paid back with interest which can be used foreconomic growth of the American States to achieve the strategic planwhich is providing relatively low-interest rate and lessenunemployment among the U.S. citizens. On matters of currency, theAmerican government has endeavored to maintain a more powerful dollarthat makes foreign bargain more easily and achieve buying rawmaterials (Packenham & Robert, 2015).
Recommendationson Whether the Strategic Plan can be Achieved Based on the aboveFindings
Basedon the above illustrations, a practical strategic plan can beattained as the American government has put in place measures such ascapital control restraints of foreign capital, prices, and taxes.Besides, as foreign investors continue to purchase the governmentTreasuries and U.S. dollars, it increases the government’ sinvestment on exports. Trade restrictions result in an increase inU.S. dollar amounts in the foreign currency exchange and as a resultof this, commodities from the local markets become expensive asforeign goods become cheap.
Furthermore,with the economy improvement and end of the comprehensive monetarypolicy, increased interest rates and high returns on governmentTreasuries make the U.S. dollar to be more valuable to attract moreinvestors. Making use of international financial integration, currenttrends in the Federal states can buy considerable assets to helpincrease the inflow of capital and uphold a more powerful currency.Similarly, as the last option to prevent unnecessary implementingsteps in devaluation of the U.S. dollar against important currencies,foreign countries can be depressed by influencing their currencies tocoordinate policies, rework barriers to export into the AmericanStates and increase wages when considered as a plan to addressserious international complications.
Packenham& Robert A. (2015). LiberalAmerica and the Third world: Political development ideas in foreignaid and social science.Princeton University Press.
FauconB. (2014). Apple in Talks to Sell iPhone in Iran. Retrieved fromhttp://www.wsj.com/articles/apple-in-talks-to-sell-iphone-in-iran-1414604199
U.S.Bureau of Economic Analysis (2016 September) Current-Dollar and RealGross Domestic Product. Retrieved fromhttp://www.bea.gov/newsreleases/national/gdp/2016/gdp2q16_adv.htm
MonetaryPolicy and the Economy. (n.d.). Retrieved fromhttp://www.federalreserve.gov/pf/pdf/pf_2.pdf
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