ECO/372 University of Phoenix

Money and the Prices in the Long Run and Open EconomiesGross Domestic product or GDP as it is referred to is a measure of the final economicactivity, and over the years it has seen changes. These changes include how the economy isgrowing, it’s spending habits as well as inflation. To better understand GDP and its history wehave to look at the market value and then add all of the market products into a single measure asit relates to what consumers are willing to pay for food, housing, healthcare and so on. Over thepast 5 years the nation has seen this increase and this paper will touch on the topic.There has been an increase in the economic status of the United States in the form ofgrowth at a 2.9% rate in the third quarter of the year 2016 which is an increase from the previousquarters of the same year. This can be used to predict an increasing Gross Domestic Product ofthe nation in the next years as it can be translated to be as a result of increasing positivecontributions from imports, exports, individual and federal government consumptionexpenditures as well as the private inventory spending. It has been the strongest and mostremarkable growth rate to be recorded in the nation after many years of stagnant GDP rates. Theeconomy of the country seems to be back on track according to the rise in consumer confidencein retail sales and in the economic state (Trading Economics, 2016). There is an increase in theunemployment rates according to the weak job creation in the nation. The economy of the nationhas recently been considered to be at or near full employment and this expected to slow down thehiring rates to a certain degree. This will lead to more Americans falling out of the workforce inthe next years.When it comes to government policy it can actually influence economic growth, theFederal Reserve is a central bank that is responsible for regulating the quantity of currency Running head: Money and the Prices in the Long Run and Open Economies3within the United States (Mankiw, 2015). When too much money is printed then the higher theconsumer cost and that will not stimulate the economy. The government is also open tointernational trade, these trades yield benefits and allows people to produce so that a boundlessassortment of goods can be consumed by the consumer worldwide. Imports and exports providegrowth in the economy by demanding labor and increasing spending.Supply and demand determines the price of a product the same way the supply anddemand of money determines its value. When prices are deemed to be to high people willtypically keep their money in their wallets and not spend it. The monetary policy can influencethe long run behavior of price levels by leveling the average of prices in the economy (Mankiw,2015) so this averages buying and spending. Inflation means that there is an increase in pricesand this is because there has been an increase in the amount of money has superseded theproductivity within the economy. Why prices increase is a cause for debate and perhaps anincrease in productivity can balance the increase in inflation, Central Banks (Federal Reserve)maintains the monetary stability within the country and they have the ability to increase ordecrease rates and that has a direct effect on the consumer who will spend or borrow money. And“as inflation rears its ugly head, the first task of the central bank should be to keep it undercontrol” (Jun 2008) there are no easy answers to this in the long run yet the Central Bank isexpected to solve the problem of inflation.Trade deficits and surplus can influence the growth of productivity and GDP in manyways as trade deficits take place when our country imports more than it exports products.International trade has become important to America as there has been an increase in trade sincethe 1950’s and this is in part because transportation has been improved ships can carry more thanbefore. Jets can now haul long distance and air transportation is cheaper, items that were Running head: Money and the Prices in the Long Run and Open Economies4perishable and produced locally like fruits and vegetables can now reach its destination fresh.Products that could not be purchased out of season are now available for consumption.Telecommunications has also played a part in being able to conduct business overseas and thepublics needs for foreign goods as well as domestic affects GDP overall. Running head: Money and the Prices in the Long Run and Open Economies5 ReferenceTrading Economics (2016). United States GDP Growth Rate. Trading Economics.Retrieved on 10 November 2016 from http://www.tradingeconomics.com/united-states/gdpgrowth.Mankiw, N.G. (2015). Principles of Macroeconomics (7th ed.). Stamford, CT: CengageLearning.Central banks cannot do miracles – there are no simple solutions to curb rising inflation, yetcentral banks will be expected to find them as political fallout mounts. (2008).