Topic: Money and the prices in the long run and open economies (1) Analyze the history of changes...


Topic: Money and the prices in the long run and open economies

(1) Analyze the history of changes in GDP, savings, investment, real interest rates, and unemployment and compare to forecast for the next five years.

(2) Discuss how government policies can influence economic growth.

(3) Analyze how monetary policy could influence the long run behaviour of price levels, inflation rates, costs, and other real or nominal variables.

(4) Describe how trade deficits or surpluses can influence the growth of productivity and GDP

(5) Discuss the importance of the market for loanable funds and the market for foreign currency exchange to the achievement of the strategic plan.

(6) Recommend, based on your above findings, whether the strategic plan can be achieved and provide support.

Gross domestic product:

Gross domestic product refers the value of all end products produced related to economies activities in economy within a year. The economic activities like production, wages paid to labor, interest paid on capital. GDP can be seen as a sum of consumption in economy, government expenditure related to economy, investment and finally net export of the nation.

Answer and Explanation:


Over the period of time due increasing scope of globalization there has been increasing trend of GDP of the countries has shown. From 1990 to till now many developing are rapidly growing even some of developing countries of Asia and Middle East shown remarkable progress. The macroeconomic indicators like GDP, saving, investment, real interest rate and unemployment are consider as measuring tools of economic growth and development of nay nation.

GDP, gross domestic product is the final goods and services produced in an economy within a year. Form last three decades it has been shown that GDP of many countries in all over the world has increasing because of increase in output and demand.

Increase in investment is the result of increase in output which finally the result of increase in demand. When investment increase increases it has positive impact on real interest rate.

Increase in investment because there is need for more production and more production has done by creating more jobs. Hence, more jobs further will reduce unemployment.

But due to some factors like trade war, heavy tariff protection will impact the countries in terms of all macro factors. Therefore, coming next five year from now, it assumes that some glitch will show in macro figure in some countries.


Government of a country has two types of policies for economic growth - monetary and fiscal

Monetary policy is the policy regarding the money supply in the market objective of the policy is to regulate the supply of money in the market by controlling interest rate purchasing or selling bonds.

Fiscal policy is the government policy of spending and tax rate adjustment policy. Objective of fiscal policy is to develop the economy by spending more or less or by regulating the tax rate system in the country.


Strength of monetary policy is the interest arte and bonds. If the money supply is required government can purchase bonds from the open market operation.

The strength of fiscal policy of government is government expenditure and tax rate system. Suppose government would have tighter tax rate at the time of higher inflation.

Fiscal policy is easier to undertake because it has tax rate adjustment slab in which government according to market condition and inflation do tight the slap or relax the slab.


Expansionary fiscal policy this policy adopt by government for increasing spending to boost the economy by the means of investment.

Contractionary fiscal policy this also adopt by the government when the inflation rate is high. So government decreases their spending and increase the tax rate.

Current fiscal policy in United States is expansionary policy. The country has just overcome the recession phase. Therefore, the economy requires investment in many projects so that unemployment must be removed and also increasing the growth in terms of gross domestic product.


There is great importance of loanable fund. Suppose authority abolished commission on every transaction of bond that is paid buyers when they purchase bond, then buyers demand more bonds because now they are in position to save commission amount. More demand for bonds will increase the price of and quantity of bond. As we know that bond market has close relation with loanable fund market. When demand for bond increases it means quantity of loanable fund has also increased and this leads to fall in interest rate.


If the current GDP has decline the expansionary fiscal policy should be taken by the government under this policy government spends more for economic developments. So the government spends in more projects, so people get more jobs an earning, ultimately increase the aggregate demand and growth.

If the current GDP has expanded, the contractionary fiscal policy should taken by government. Under this policy government spends less in various projects. Basically government pulls out money form the economy to tackle the problem of inflation. Inflation is the effect of excess money supply which turns it into inflation. When money supply decrease, then aggregate will automatically fallen.

Learn more about this topic:

Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3

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