Money resources, a sophisticated infrastructure, a large and well-educated

Money and the US Economy

Introduction

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 The US economy remains important worldwide,
contributing about 20% of the total global output (Gregory, 2004). Despite
facing significant challenges, it has remained the largest economy with a
highly developed services sector which contributes to about 80% of the US total
output. The US also has a large manufacturing base that helps to about 15% of
the full production. Agricultural activities contribute only 2%. However, due
to advancement in technology, the US is still the biggest agricultural
exporting country worldwide. The US remains the world’s largest economy through
a combination of some factors such as an abundance of natural resources, a
sophisticated infrastructure, a large and well-educated workforce as well as
its free market and business-oriented environment.

 In this paper, the primary focus will be on
the US economy, changes in the GDP, savings, investment and real estate rates.
The paper will seek to establish how the quantity of currency impacts long term
inflation and interest rates, production and workforce in short term, as well
as how government policies affect the economy in the long run in aspects such
as unemployment levels, price levels, inflation and other nominal variables.

 

 

Changes
in the US GDP, Savings, Investment, Real Interest Rates, and Unemployment

The
history of the US economy dates back to the end of World War II which marked
the beginning of a golden era for the US economy (Gregory, 2004). During this
time, there was an economic surge and a growth of a more prosperous middle
class. From the late 1940s to the early 1970s, the U.S. GDP grew at an average
annual rate of about 4%. By the 1970s, the economy changed from industry and
manufacturing to services. However, after several years of groundbreaking
development, the careful use of material resources began to show signs of
losing momentum and a series of events, including the collapse of the Bretton
Woods system and the 1973 oil crisis (Gregory, 2004). The economy is faced with
increased world competition. The term stagflation was used in the 1970’s
because by of inflation and stagnating growth. The 1980s was the period of
Reaganomics introduced by President Ronald Reagan that came about with various
policies such as reduction of government spending, lower taxes, and tighter
money supply. Steady growth in productivity marked this period. However,
government’s debt increased significantly. Steady growth in productivity marked
the period of the 1990s. There was a steep rise in employment levels as well as
income and consumer demand. The economic improvement was made possible partly
by the increase in tax by President Bill Clinton and partly by an economic
surge. The period of the great recession that happened between the years 2007
and 2009 saw the US economy face the most profound and most extended downturn.
During this period, businesses were significantly affected leading to a rise in
unemployment levels. Savings and investment levels went down considerably as
people had nothing to save or invest. Real estate rates went up, with most
people unable to pay their mortgages due to loss of jobs.

The
US economy has seen a significant improvement since its recovery from the great
recession (Alcidi &
Gros, 2011). The GDP levels have improved significantly mostly from tax
revenues. There has also been an increase in the number of exports especially
of manufactured goods such as motor vehicles. The service industry has also
played a key role in the improvement of the economy. However, unemployment
rates are still high.

Over
the next five years, the US economy is likely to face major challenges. This is
due to increased competition from the global economy. Economies such as China
and Japan have been keeping the US on its toes especially in the manufacturing
sector. Unemployment rates are likely to continue increasing as industries cut
costs. This is likely to bring down significantly the levels of savings and
investment.

Influence
of Government Policies on Economic Growth

Monetary
and fiscal policies employ to influence economic growth and inflation (Mester,
2016).

Monetary policy:
Through this, the government can revise the rate of interest to affect the
reserve of funds (e.g., through quantitative easing). To encourage spending in
the economy and encourage economic growth, the government may drop interest
rates and raise the supply of money. However, this can cause an increase in
inflation. If the economy is growing too much and there is too much inflation,
the government can increase interest rates and lower the supply of money to
discourage spending.

Fiscal policy:
This is done by adjusting government spending and taxation to impact total
demand. To expand interest in the economy (and thus economic growth), the
government may increase government spending and reduce tax. If the government
wants to drop total need, they may lower government spending and raise
taxation.

Influence of the
Monetary Policy on the Long-Run Behavior of Price Levels, Inflation Rates,
Costs, and other Real or Nominal Variables

An
increase in interest rates decreases the cost of borrowing. This reduces the
amount of money flowing into the economy (Mester, 2016). As a result, prices of
commodities decreases but since there is not much money, there is reduced
spending. This affects industries since their goods do not move. To encourage
people to purchase, there are product promotions which further increases cost
to companies. This could further lead to a rise in unemployment levels as
industries try to reduce costs spent on salaries and wages. Banks and other
lending institutions also struggle to lend out. As a result, there are fewer
returns to the banks from loans as the loans are only accessible to the rich
who are few.

On
the other hand, a decrease in the interest rates reduces the cost of borrowing
(Alcidi & Gros, 2011).
As a result, banks lend out more, and this increases the amount of money
flowing into the economy. This can lead to inflation with the cost of
commodities going significantly high. This will lead to an increase in the
number of imports as people look for cheaper substitutes. This is likely to
affect the local economy as money goes out of the country rather than coming
in. The domestic industries lack the market for their commodities, and this
could also lead to a situation of unemployment.

Trade Deficits or
Surpluses Can Influence the Growth of Productivity and GDP

Trade
deficits and surpluses play an essential role in how the economy regulates its
imports and exports (Gregory, 2004). Trade deficits occur when a country incurs
more on imports than it gains from its exports. When trade deficits arise, it
means that the growth of productivity is affected because the economy is not
able to compete competitively in the global market. This changes the country’s
economic growth, and consequently, the GDP goes down. This causes the government
to impose taxes and tariffs on imported goods to encourage local consumption
and discourage importation of products.

When
surpluses occur, it means that the country is gaining a lot more from its
exports than it is spending on imports. This is a situation of economic boom.
The country’s productivity increases significantly, and this consequently
increases the country’s GDP. Industries are at their best, and there is an
increase in growth opportunities. However, this could also lead to inflation as
a result of more money flowing into the economy (Leightner, 2010). As a measure
to curb this, the government could adopt fiscal policy measures. The government
could also result in buying more of its treasury shares to lower the inflation
rate.

Importance
of the Market for Loanable Funds and the Market for Foreign-Currency Exchange
to the Achievement of the Strategic Plan

Loanable
funds are critical to an economy because they are one of the determinants of
interest rates (Bureau of economic analysis, 2017). Loanable monies come from
deposits made by bank clients which the bank then uses to lend out to
individuals and companies that need the money for development. The bank,
however, charges interest on money borrowed from it. This interest rate affects
the rate at which money grows in the economy thereby changing the inflation
rate. For a country seeking to invest in foreign countries, it will, therefore,
be essential to compare the interest rates in the foreign country to those in
the country home. This will result in borrowing of money from the country with
lesser interest rates.

The
US prides itself on the ability to loan money to foreign economies thus earning
the US great returns from interest on loans borrowed (Mester, 2016). This has
seen the economy of the US grow which has in performance led to a growth of
industries. An increased economic growth will result in the achievement of the
strategic plans for the companies and industries and the US in general.

The
foreign exchange market determines the national purchasing power as well as the
national and international credit. It is through the foreign trade that a
country can clear its debts and reduce its external dependency. The US has
managed to keep the dollar rate high as compared to most foreign currencies.
The US dollar has remained superior to other foreign currencies. This has
enabled the US economy to continue outperforming the other economies as
companies importing from other countries can do so comfortably, and those
trading in foreign countries can achieve their international bargain easily.
This has enabled firms to make their strategic plans for increased
productivity, increased production, and growth.

Whether
the Strategic Plan can be achieved

The
achievement of the strategic plan for increased productivity and increased
economic growth depends on the various financial variables discussed. For the
US to attain economic growth and stability, the multiple sectors of the economy
must work hand in hand. For instance, the US must address the imbalance of
trade between its exports to foreign markets as well as its imports as an
imbalance of the two usually has an adverse effect to the economy of the
countries involved (Leightner,
2010). However, the US should aim at encouraging foreign savings to
continue importing from the US so that there can be a mutual benefit between
the US and other international markets. The continued growth of the US exports
will continue to see economic growth and opening up to more industries. This is
likely to promote employment and thus reduce the levels of unemployment in the
US. Consequently, there will be a decrease in the level of crime as more and
more young people will be taken up in the newly established industries.

To
encourage this economic growth, monetary and fiscal policies also need to happen
(Alcidi & Gros,
2011). The federal government should continue to employ monetary policy
by lowering local lending rates. This will enable the banks to lend out more to
the SMEs who contribute a lot to the growth of the economy. Additionally, it
will boost local businesses and increase the number of middle-class citizens.
The government however also needs to be careful to prevent or curb inflation
levels by lowering the amount of money flowing into the economy. This is because
inflation is likely to reduce the value of the dollar, therefore, making the
dollar weaker than other currencies which would affect the US economy much. The
federal and county governments must also ensure that they reduce government
spending by cutting the cost of additional government budgets through the
increase of government tax.

The
United States is generally looked at as the origin of free-market economic
policies. However, the U.S. government uses a remarkable amount of management
over industrial, commercial and financial activities. These laws are essential
to keep the performance of the dollar on the check. Rules such as the level of
interest rates on borrowed capital as well as the taxes levied on imports are
essential to ensure that the economy remains competitive.

While
the competition for work has improved considerably and service has come back to
pre-crisis levels, there is still widespread debate regarding the health of the
U.S. economy. Also, even though the worst effects of the recession are now
fading, the economy still faces a variety of significant challenges going
forward. Declining infrastructure, wage stagnation, elevated income inequality,
costly medical costs and pensions, as well as extensive current account and
government budget deficits, are all issues facing the US economy. This means
that both the federal and county governments must each play their respective
roles to ensure maximum growth of the various sectors in the marketplace.

Conclusion

In
conclusion, the US economy continues to be the leading world economy despite
significant setbacks and stiff competition from other foreign economies. The
issue of unemployment has continued to be a significant challenge with so many
educated but unemployed youth. This has led to a high dependency ratio with
very many young people depending on the few working individuals. Additionally,
the vast recession affected various sectors of the economy in the US, and the
impact is still felt today with the high cost of living. However, the adverse
effects of the great recession have slowly faded away especially with the
improved GDP, and this has enabled the country to gain a competitive edge in
the foreign market as the number of exports has also significantly improved. To
that effect, the federal should ensure that the fiscal and monetary policies
are put in place to avert a crisis that may recur and degenerate into another
economic recession.

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