Running head: MONEY AND PRICES 1

Money and the Prices

Student

Institution Affiliation
MONEY AND THE PRICES 2

Money and the Prices

When developing market growth plans, it is essential to consider prices and money in the

open economy. Market growth is sensitive to the two factors that determine its functional

outcomes. The market economy is also triggered by other factors such as foreign exchange,

monetary policy, and trade deficits. The United States has maintained a stable market economic

growth that is indicated by a balanced national budget. The paper will provide the history of

changes in GDP, real interest rates, investment, savings, and unemployment and compare to

forecast in the next five years.

The History of Changes in Investment, Savings, GDP, Unemployment, and Real Interest

Rates while Comparing with Forecast within the Next Five Years

The annual economic growth in the United States has been 1.2% within the last eight

years (Trading Economics, n.d.). The slow growth was further affected following the 2008

economic crisis. The recession led to a negative GDP in the year 2008 and 2009 (Trading

Economics, n.d.). However, over the last five years, the economic growth has been recovering

but at a gradual rate. Within the five years period, the economic growth has risen to 2.2% which

is below the government target (Trading Economics, n.d.). The federal government had aimed at

helping the economy to rise up to 3% or 3.5% (Trading Economics, n.d.).

Reports from the Trading Economics show that America has been enjoying the largest

economy globally. However, when the U.S. is compared to other developed countries, its

economic growth has been on a negative trend. The report went ahead showing that in the 1950s

to 1960s, the country was enjoying an economic growth of 4% (Trading Economics, n.d.).

However, following the onset of the 1970s to 1980s, the rate dropped to 3% (Trading
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Economics, n.d.). This has been extended to the recent past where within the period of the last 10

years, the average economic growth has been 2% and below (Trading Economics, n.d.).

The America economic status has been quite unstable in the past half decade. For

instance, at the start of 2011, the economic growth was at its lowest (Trading Economics, n.d.).

The year recorded an economic growth that was below 0%. Conversely, the following year, the

rate drastically increased to 4.5%, which extended to around the end of 2015 (Trading

Economics, n.d.). As a result, the general condition of the U.S. economy can be considered

relatively favorable. This has been further indicated by the Institute for Supply Management

Index that for the last five years has remained positive. The second quarter of 2016 indicated that

the total gross savings in America were at 3350.3 billion dollars (U.S. Bureau of Economic

Analysis, 2016).

Focusing on the issue of employment, unlike in the past two decades, there has been an

improvement in the non-profit payrolls (Mankiw, 2007). Further, in the last five years, U.S. has

been having low-interest rates. Similar trends have been observed in mortgage lending together

with government tax regulation. The approach has led to the American economy being classified

as one of the best economies in the world.

From the year 2016, the rate of unemployment has been reduced to 4.9% (Trading

Economics, n.d.). The reduction in the rate of unemployment has been recording an upward trend

since 2016 (Trading Economics, n.d.). The following year recorded a reduction rate of 5.1%

(Trading Economics, n.d.). On the other hand, the history of investment has been experiencing

an irregular trend. In July 2015, the U.S foreign direct investment was at $43163 million

(Trading Economics, n.d.). The value reduced to $33199 million by January 2016 (Trading

Economics, n.d.). This trend has continued until the year 2017 where the investment rate
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appeared to be stabilizing. The level increased from $44328 million in 2017 to $45701 million in

January 2018 (Trading Economics, n.d.). It is expected that the positive trend would continue in

the next five coming years.

Effect of Government Policies to Economic Growth

The government is responsible for setting rules and regulations that are used in

businesses. Therefore, business operations are supposed to abide by the set rules. Any change of

the policies will require a similar change in the business operations. The effect has been found to

influence business profitability and competitiveness. The laws could either set by local, state or

federal government.

The government has the mandate to control the selling of goods and services in the

market (National Bureau of Economic Research, 2018). The body provides specific prices for

goods. This has a common being found in the crude oil industry where the government provides

the prices for petrol and diesel. The approach is to protect the public from exploitation by the

entrepreneurs. The approach encourages diversification since entrepreneurs have to think about

many ways of making a profit instead of using one method and exploit their customers.

The government also introduces a customs duty on goods and services. This leads to a

rise in the prices of commodities. Besides, taxes negatively affect the amount of profit that

entrepreneurs make from their investment (National Bureau of Economic Research, 2018). As

stated earlier, the government can control the profitability of business people. Introduction of

high taxes reduces the profit. Conversely, a reduction of taxes on goods increases the amount of

profit made. However, taxes are important in helping the country’s economy to grow.

Further, the government helps entrepreneurs to make more profit by introducing new

technologies. The technologies increase the level of production. Sometimes, the government has
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to incur cost while implementing new technologies and systems in the market. However, this is

its mandate. Additionally, the government helps in economic growth by creating room for

foreign investors. Settlement of the investors helps to boost the economy through taxes paid.

Investors are also a source of employment that also helps in the economic growth (National

Bureau of Economic Research, 2018).

The Way Monetary Policy would Affect Long-Run Behavior of Price Levels, Inflation

Rates, Costs, and Other Nominal Variables

The government is able to utilize monetary policy to control the economic status. This is

connected with the political objectives that are found among the government leaders. In this case,

the government is able to use the monetary authority to influence the way money flows in the

economy. In most cases, the approach is usually aimed at having a macroeconomic stability. The

impacts are low inflation, employment, and economic growth. The monetary policy is usually

implemented by the Central Bank (Mankiw, 2007). The bank is mandated to ensure a country

has a solid economic performance. At the same time, the living standards upgrades among the

citizens. When there is a high supply of money, the inflation rate also rises. This is due to the fact

that the credit policy tends to loosen. It leads to the acquisition of credits at cheaper prices.

Similarly, as the economy expands, the level of employment increases.

Presence of monetary policy has also been found to affect the flow of goods and services.

The flow increases employment rate as well as profitability among the public. This is unlike the

fact that firms and households take long before they adjust their behaviors (Lacker, 2016).

Similarly, economists hold that the increase in individual income is directly affected by

technological change. The technology brings about effects in capital and labor output. In this

case, the increase in production does not result from the number of people working or machines
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(Lacker, 2016). Instead, higher production occurs due to technological advancement which

makes the few available workers more productive (Lacker, 2016). Additionally, new techniques

and inventions bring about the similar impact to economic growth. Therefore, the government

tries to support its citizen to help invent and come up with better ways of producing goods and

services.

Contrary, poor monetary policy collectively affects a country and its people. Such a

policy leads to the citizen using the available resources which eventually goes to waste. The

effects are inflation where money continue losing value the more they are saved. To avoid this,

low and stable inflation is advocated.

Trade Deficits or Surpluses Affect the Growth of GDP and Productivity

Flows of trade occur where payments are exchanged. Most people hold that a country

should rely on its own resources other than borrowing from neighboring countries. However,

none of the countries has all the necessary resources that meet all demands from the citizens.

Therefore, relative borrowing is healthy and necessary for the economic growth. As a result,

borrowing for the purpose of development or investment is healthy for the economy. For

instance, money borrowed for improving education will have a long-run payoff. Education will

enable people to earn higher wages and they will be able to pay back the loans. Hence, it means

that borrowing for the sake of development leads to economic growth. The approach requires a

country to pay back the borrowed fund while in the long-run, the country remains better off than

before.

Hence, regardless of a country suffering from trade deficits or surplus, all that matters is

the way the handle the resources borrowed externally. Large trade deficits can be lethal when

used inappropriately. This occurs when the borrowed funds were not allocated to the activities
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that they were first targeted. This lost to the country suffering from the inability to pay back the

funds (Kuepper, 2018). Similarly, borrowed funds can be allocated in nonproductive economic

assets. This result in such countries paying large interest payments while there is no parallel

economic growth.

Trade surpluses, on the other hand, can be considered as beneficial or limiting. Such an

incidence was observed in Japan (Kuepper, 2018). However, the surplus trade was not beneficial

to their GDP. Such a country suffers from a high rate of domestic savings more than they can

invest domestically (Kuepper, 2018). As a result, they are forced to invest the extra funds outside

the country. Similarly, the surplus trade means that the consumption rate of both the imports and

exports is relatively low (Laya, 2018). This results in a slowly growing economy and low GDP.

Importance of the Market for Loanable Funds and the Market for Foreign-Currency

Exchange

The market provides an important avenue for the loanable funds. The funds are directed

toward developing programs that eventually increases the productivity. Market helps in the

coordination of loanable funds, investment, and economy’s savings. Real exchange rate directly

affects the supply and demand of both the domestic and foreign goods. This in return affects the

relative price of the two types of goods. An increase in the exchange rate in the United States

results in domestic goods shooting at a price. This discourages local consumers as well as

foreigners. However, a low exchange rate will facilitate the flow of foreign currencies, which in

return attract more foreigners and investors. Domestic goods will be cheap compared to the

foreign ones enhancing internal trade.

Recommendation for the Strategic Plan

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As per the above findings, there are several issues to be addressed in the U.S. economic

status. First, the low-wage economic strategy should be replaced with an updated high-wage

strategy. This will be achieved by increasing the employment rate. Low employment rate leads to

a reduction in wages. The country should focus on a situation where every American who is able

and willing to work to have an opportunity for employment. This is without the fear of inflation

pulling down the objective. This will work together with other sectors such as infrastructure and

education. The government should direct funds to these areas which in return will improve the

level of employment.

Further, the government should continue increasing more opportunities for foreign

investors. Investment should also be enhanced for the Americans. This in return will raise the

rate of employment in the country. To boost the country economy, modest taxes should be added

in all foreign and domestic goods. Capital gains, wages, and salaries should be taxed which in

return will boost the country’s economy.

The United States also should focus on enhancing its productivity. The government

should evaluate business activities that weaken the economy. Monetary policies should be

adjusted in such a way that they benefit the Americans. This will correlate with President

Trump’s philosophy of putting American first. The approach will concentrate the wealth of the

country at the reach of the citizens.

In conclusion, the flow of money affects the stability of a country economy. This has led

to the formation of monetary policies that regulate the flow of currency. A large supply of money

into the market will lead to a failing economy. Therefore, the government has the mandate of

controlling the amount of currency in a country. Similarly, the government directly or indirectly

affects the economy. The government sets policies and rules that investors and business people
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should abide. Introduction of high taxes on goods results in the price of goods and services

increasing. Additionally, the provision of opportunities for investors to grow directly affect the

economy where there are more employment opportunities. This in return affects the GDP of a

country positively. It is the responsibility of the government to set strategies that enhance the

economic growth of a country.

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References

Kuepper, J. (2018). Trade Deficits, Surpluses and Their Impact on Investors. Retrieved from

https://www.thebalance.com/trade-deficits-surpluses-and-impacts-on-investors-1978872

Laya, A. (2018). Here’s Why It’s Time to Ditch our Obsession with Trade Deficits. Retrieved

from https://www.weforum.org/agenda/2018/05/trade-surplus-deficit-growth-jobs-

arancha-gonzalez/

Lacker, J. (2016). Can Monetary Policy Affect Economic Growth? Retrieved from

https://www.richmondfed.org/press_room/speeches/jeffrey_m_lacker/2016/lacker_speec

h_20160224

Mankiw, N. G. (2007). Principles of Economics. Mason, Ohio: Thomson/South-Western.

National Bureau of Economic Research, (2018). Firms in Developing Countries: Can Trade

Policy Serve as Competition Policy?

Trading Economics, (n.d.). United States GDP Annual Growth Rate. Retrieved from

https://tradingeconomics.com/united-states/gdp-growth-annual