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MONEY AND THE PRICES 2
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
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
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
MONEY AND THE PRICES 3
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
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
MONEY AND THE PRICES 4
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 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
MONEY AND THE PRICES 5
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
The Way Monetary Policy would Affect Long-Run Behavior of Price Levels, Inflation
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.
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
MONEY AND THE PRICES 6
(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,
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
MONEY AND THE PRICES 7
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
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
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
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
MONEY AND THE PRICES 9
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
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
National Bureau of Economic Research, (2018). Firms in Developing Countries: Can Trade
Trading Economics, (n.d.). United States GDP Annual Growth Rate. Retrieved from
https://tradingeconomics.com/united-states/gdp-growth-annual