Money and the Prices in the Long-Run and Open Economics - Paper Example

Introduction

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The management of the flow of money in an economy is a critical dimension of economic growth, development, and sustainability. The balance between imports and exports assist in ensuring the current income within the household dimensions creates additional monetary value. Financial institutions, therefore, become essential bodies to control the circulating revenue for the stable market price. Changes in the price of products and services determine the investment, inflation, and interest rates. Nevertheless, there must be a collection of effort and teamwork from all the stakeholders to guarantee an equilibrium financial status for economic development. Therefore, government interventions, monetary policies, sustainable loanable funds, and foreign currency exchange can be included as dimensions of strategic financial planning and implementation to guarantee efficient economic system and market (Basak & Makarov, 2014). This paper evaluates the United States historical perspective of the trade and national income indicators to present how the relationship between growth rate of money and inflation can be used to plan for growth and development.

History of Economic Indicators and Overview ForecastThe Gross Domestic Product (GDP), saving, investment, interest, and unemployment rates can be used to assess the level of economic growth and development in a country. By analyzing a range of data and including the external and internal factors unique to that country, notable predictions can be proposed to assist in setting economic strategies and policies. Over the years, the economic indicators in the United States have depicted different trends based on the level of the countrys financial resources and factors of production.

The recent five years in the United States has been characterized by unstable GDP growth rate if considered on a quarterly basis. The highest value was witnessed in the third quarter of 2014 at 5% with the lowest percentage of about -1.5% in the first quarter of 2014. However, the annualized average growth rate has been stable at 1.9% with 2016 associated with a lower rate than the previous years. At the end of 2016, the GDP rate was at 3.5% higher than the predicted 2.2% increase. The factors that contributed to the decelerated GDP included the increasing imports and a corresponding decrease in exports, as well as a declining federal government spending on public projects (NBER, 2016; Trading Economics, 2016). The inflation rate, which is also determined by the consumer price index, depicted a similar trend to the GDP within the past five years. The highest rate was recorded in the last quarter of 2010 at 4% while the lowest index was at 0% in 2015. However, the average five-year analysis shows that the rate of inflation in the United States stands at 2.1%, which matched the market expectations (Trading Economics, 2017). Two major contributing factors to the shifts in consumer price index included the price of gasoline and housing cost that changed over the past five years in the country.

On the other hand, the household saving rates in the country have been stable between 7% and 4%; however, an extended analysis of the past 20 years indicates that personal saving in the United States averaged 8.31% (NBER, 2016). Other considerations regarding the savings rates emanated from the personal income and spending habits as well as the effect of market inflation. The rate of the bank interest on loans also contributed to the shifts in the level of savings for each income bracket among Americans. The investment rate among individual and in the corporate sector also showed significant and stable changes over the past five years. The factors that determine the return on investment include the rate of interest on deposits in commercial banks and other financial institutions. Over the years, the mortgage rates, as well as the nature of investment undertaken in the corporate sector, defined the rate of investment. Nevertheless, other new dimensions such as the credit card limits and capping of personal loans have a notable impact on investment rate.

Moreover, the Federal Reserve rates on government funds and corporate sector investments have been maintained at 0.5% from 2010 to 2015; however, the national resolution meeting agreed on a 50% increase to a standard rate of 0.75% in 2016 (NBER, 2016). The objective of such changes is to target an increase in domestic income stability and encourage local production to transform the declining exportation previously associated with the United States economy. Based on the shifts to stabilizing the revenue among the citizens, the rate of unemployment has decreased spontaneously in the country. The low level of Federal Reserve has enhanced the number of jobs created, which increases not only the consumer purchasing power but also the rate of saving among the American population. The following figure shows the trends associated with the major economic indicators in the country between 2010 and 2016.

The need for a sustainable and growing economy has created the need to set strategies meant to stabilize the circulating income in the economy with the objective of increasing productivity and lowering the rate of inflation. Therefore, based on the local and global needs of the economic stability in the United States require the assessment of previous performance with the aim of setting performance targets. Economists have predicted the trends associated with the economic indicators with the GDP, interest rates, savings, and investment rates expected to grow spontaneously (BEA, 2017). However, the rate of unemployment is projected to decrease with a small magnitude. The following diagram represents a summary of the forecasted indicators within the next five years, which are estimates subjected to external and internal influence.

Government Policy and Economic GrowthThe performance of a countrys economy depends on several factors as highlighted in the previous section. The analysis of the past performance data can be used to set the targets and forecast the anticipated outcomes. However, it is essential to incorporate the implication of the government policies on the cumulative growth and development of the economy. Several avenues and methodologies have been used across the globe to influence the rate of economic development in a country. The theoretical frameworks are based on the endowed resources and the level of access to factors of production. Avenues such as enacted policies, political manifestos, and inter-state agreements can be used to encourage development.

The decision by governments to focus on non-recurrent expenditures is meant to enhance economic growth through infrastructural development and industrialization. The government can also use market production through financial aid to increase output and export to encourage a positive balance of payment (Beckmann, Endrichs, & Schweickert, 2016). Setting education, healthcare, and employment policies is meant to enhance the capacity of citizens to access factors of production, skills, and ability to transform inputs to long-run growth. For example, the recent poor economic low GDP growth rate experienced in the United States was associated with the decreased exports and increased imports (Boso et al., 2016). Therefore, policies that will encourage more local production, foreign direct investment, and high government spending on public projects will assist the country to attain the forecasted 2020 GDP level. The setting of development strategies focusing on population growth rate and the magnitude of industrial production will help in curbing unemployment.

Monetary Policies and Price VariablesThe effect of price variability is essential for the anticipated long-run growth in a particular economy. However, the use of short-run decisions can assist in creating a sustainable monetary system that will stabilize the interest, investment, and inflation rates. In the United States, the efficient management of the circulating income through the central banks and the administration of the Federal Reserve have played a vital role in sustaining the market price across the industries. The need to reduce excessive short-term growth, which affects the sustainability of the long-run development, defines the measures set to control the circulating money (Jonson, 2015).

Moreover, in the United States, the use of tax structures that control consumption based on the required shifts has dominated the monetary approach used to monitor prices. For example, the imported products are highly taxed to increase their market prices to discourage excess importation. On the other, consumption of local brands in encouraged through low tax and market costs. Furthermore, the management of government spending is meant to limit the flow of money into the households. Other mechanisms such as the use of economic regulations such as strategic global integration have assisted the United States to balance the need for long-run growth. The need to balance between the short-term decisions meant to curb inflation and abnormal interest rates. The effect of short-term decisions is critical since it encourages instantaneous super growth, which later jeopardizes the need for sustainable market prices and economic stability (Foresti, 2017). Based on the anticipated growth in the country in the next five years, it will be essential for the country to review the monetary policies on market price, inflation rates, the cost of production, and interest on savings strategically.

Trade Deficits, Surplus, and GrowthThe production of commodities and services in the U.S. has played a significant role in sustaining the economy. The imports and exports are directly dependent on the rate of production based on the local demand and global supply. Trade deficit affects the economy of a country since it encourages more imports and fewer exports, which is associated with lower internal development. The overdependence on imported goods and services discourage the establishment and growth of local industries and expertise. The performance of a country that is inclined to external sourcing is reduced on a global scale (Kang & Kang, 2013). Such a case is associated with low GDP rate and per capita income. Moreover, scenarios related to underutilized natural resources and factors of production emanates from trade deficits.

On the other hand, surplus production has been a fundamental aspect of the steady growth in the United States in the previous years. The global performance in line with interstate corporate engagements has encouraged more exportation to increase foreign exchange and a positive balance of payment. An economy associated with surplus production is in a position to expand the targeted market beyond the local segment to enhance revenue, employment, return on investment, and a multidimensional and sustainable economic growth. For the Unites States to achieve the anticipated increase in GDP rate, the inclusion of the effect of trade deficit and surplus should be evaluated strategically.

Market for Loanable Funds and Foreign-Currency ExchangeThe equilibrium between money dem...