Money and the Prices in the Long Run and Open Economies

Money and the Prices in the Long Run and Open Economies

Purpose of Assignment 

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. 

 

Assignment Steps 

Resources: National Bureau of Economic Research 

 

Develop a 2,200-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. 

Format your paper consistent with APA guidelines. 

Discuss How Government Policies Can Influence Economic Growth

Government policies largely play important role in rejuvenating the economy. However, for such growth to happen, the government has to consider a play-off of factors and deploy different measures that are balanced to the existing economic conditions. Governments rely on the monetary policies as among the most effective practice of stimulating growth in the economy. They do this by lowering of the interests’ rates hence reducing the cost of borrowing from the financial institutions. In a way, investors tend to spend more in making new forms of investments while customers tend to spend more since they have access to more disposable incomes.

Another form of policy that the government may rely on is the fiscal policy. Fiscal policy focuses on the government’s modes of raising finances especially through the taxes. The government can cut back on its taxes while increasing its level of investment to increase the money in supply. Lowering the tax rates, citizens have more disposable income, which they would want to spend. The government may also increase its spending which is one of the ways jobs and other opportunities arise, and in essence, this influences growth. This policy may become a challenge since the government may be forced to borrow money, which may not be feasible in the long run. However, there is still the option of raising the taxes to finance its business (Fatas & Mihov, 2013).

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

Government uses the monetary policies as a way of influencing how the economy works. Usually, the monetary policies are inclined to the existing political objectives that may have been adopted. The monetary policies in any country are considered the building block that determines the supply and availability of money in the economy. The goal of the monetary policies has been ensure there exists the macroeconomic stability that ensures there are manageable low levels of unemployment, inflation, economic growth and the balance of the payment (Malmendier & Nagel, 2015). Monetary policies are relied by lowering the interest rates which partly is a move aimed at aiding customers to spend more hence making the whole borrowing process cheaper and ensuring an increase in demand and the level of employment also known as the expansionary monetary policy. A fall in the exchange rates, which may be, characterized by the imported inflation and in turn influence the level of spending made on the imported products. However, the real success to the monetary policy lies in finding the existing gap between the high degree of insecurity and unpredictability. Central banks usually aim at attaining low inflation and stability in the prices in an effort to ensure high level of economic growth (Hanson & Stein, 2015).

Source: (Edwardmcphail.com 2017).

The contractionary monetary policy also exists as an approach that can reduces the level of inflation hence influencing the rise of the interest rates. The rise in the interest rates urges consumers to stop spending, save more and avoid borrowing at any cost. The demand for the nation’s currency rises making importation less expensive. Consumers can then afford the cheaper imports as opposed to the local products. This effect trickles down to high unemployment since firms cut on labor; banks face stiffer exchange rates and consumers face tough rates, thus loans become unaffordable. In the long run, capital investment of firms reduces and the economic growth slumps.

Source: (Edwardmcphail.com 2017). 
Describe how Trade Deficits or Surpluses Can Influence the Growth of Productivity and GDP

Trading deficits exists whenever a company imports more of goods and services as opposed to its exports. Countries under deficit as McCombie & Thirlwall (2016) explains may want to depreciate their currency as part of a move to increase the level of exports and to balance the trade. Trade deficits affect the economy of a country by increased job loss since manufacturing companies have to give up their capacity to produce, as there are cheaper products from abroad. In US, such deficits lead to income inequalities especially when local firm invest in foreign countries. The downside of this is that the suppression of wages and the fall of the prices of the local products tend to affect the bargaining of the firms. There are other disadvantages such as the weakened productivity since firms cut back on the level of research involved towards the production of products. Lack of research in turn leads to stagnation, which affects negatively the GDP. Economists argue that the US government should support the excessive national venture over reserve with the influx in the foreign capital and counterbalance this with the existing deficit.

 

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