Real GDP

The actual gross domestic product is a significant factor in macroeconomics. It is significant for two reasons. First, it aids in estimating economic growth by measuring the actual GDP growth rate. A nation with a high rate of real GDP growth is well positioned to lure corporate investors while still growing its defense exchange business. Since real GDP categorizes contribution from various industries, citizens and the government may determine which sectors contribute the most to the real country GDP. It aids the nation in taking the requisite measures to improve the industry's poor productivity. Real GDP refers to the measurement of the economic output that takes into account the effects of inflation or deflation. It reports the GDP as if there were no changes in prices. It thus eliminates the notion of communicating what is not real. The real GDP is calculated by dividing nominal GDP by the deflator.



The real GDP measures inflation about a year called the base year. All the inflation rates are computed concerning base year so that consistency and accuracy are maintained. The real GDP measures production based on the final output of all goods and services. However, some services which are hard and complicated to quantify are not included to avoid overstating or understating the nation real gross domestic product. The ideal GDP growth rate is expected to range between 2% and 3%. Very high growth may result to rising level of inflation rate in a country.

The Federal Reserve uses the real GDP reviews to decide on Fed funds rate. The rate tends to be raised when the growth rate is quite fast. The increase in real GDP provides investors with insight into how asset allocation should be done in different portfolios. It is through real GDP concepts a person can be able to opt for a fixed mortgage interest to lock for high interest by the Fed especially when the growth rate is high.

Inflation

Inflation refers to rising of price levels. The continuous rise in price levels is caused by an increase in the money supply. It results when the government decides to print a lot of money. The high money supply causes overspending making people thus raising the demand for goods and services. The high demand, in turn, results in high price levels. This results in high GDP levels (Blanchard, Cerutti, and Summers, 2015). Superficially inflation is regarded as good since it makes production to increase thus increasing the overall GDP. The increased GDP, in turn, strengthens the security market due to over excitation of investors.

Unemployment

Unemployment is a state I which employable people are not employed in a certain nation. It arises the tight labor market is blended with increasing inflation rate. When the inflation gets out of hand, people tend to spend more, their marginal propensity to save decreases and thus decreased investments. The decreased investment lower employment opportunities and thus high unemployment rates. The above three concepts are considered to be the three pillars of any economy, and the government must work to ensure it strikes a balance between the three concepts. Lest its economy crumbles.

Aggregate Supply and Aggregate Demand

Aggregate supply refers total amount of finished goods and services that firms produce and sell. It exhibits a positive relationship between price levels and real GDP in the short term. On the contrary, aggregate demand explains or refers the gross amount of spending on domestic goods and services in a nation. When plotted on it shows an inverse relationship between the real GDP and total domestic spending. The aggregate demands include the following constituents: consumption, investment, government spending and net exports fewer imports. Price is a major factor that influences aggregate demand.



Recessionary and Inflationary Gaps

Recession gap tends to arise when the real GDP is lower than Potential real GDP. Potential real GDP is the GDP adjusted for inflation at full employment. During the recession, the unemployment rate exceeds the natural state of unemployment. The natural rate of unemployment is achieved at potential real GDP. The inflationary gap sets in when real GDP exceeds potential GDP, and at the same time, the unemployment rate is below the natural rate of unemployment. During the inflationary gap, the job seekers are less, and job opportunities are many in the labor market. To attract employees, employers raises the wage too high levels.

The Fed provides the US nation with quite flexible and seamless monetary and fiscal policies that streamline the nation financial systems. It also acts a Central Bank of the United States. It serves to influence the economy's interest rates through the use of the monetary and fiscal policy. The fiscal policies the Fed can increase government spending to the desired level (Ramtharan, Jenkins, and Ekanayake, 2007). The increase in government spending results in high real GDP level accompanied by a low level of interest rates. The finished product becomes affordable to many and establishment of employment increases (Blanchard et al., 2015).

The Fed’s Dual Mandate

Its dual mandate is to control the rise and fall of interest rates in the US. The tools that Fed uses to achieve its goals include the reserve requirement levels, the discount rates and use of open market operations.

Contractionary and Expansionary Policies

When the Fed uses the expansionary policy, it aims to reduce the interest rate, increase aggregate demand and increase the money supply. The overall effects result to increased real GDP. With time the policy reduces the value of the currency and thus decreasing the exchange rate. On the contrary, contractionary policy results to a reduction in aggregate demand, the interest levels rise, and the money supply is reduced. More often the Fed do not employ the policy because it wants the economy to grow.

Summary of the Articles

Fed Slows Down on Plans to Pursue Interest Rate Increases by Binyamin Appelbaum, the New York Times

The Fed decided to raise interest rate by 1% following various warnings from the US economy. Upon announcement, the security market prices rose sharply closing at 0.56% for that day. The move made the investors happy, and most of them sought to invest in stock markets. The rise in interest provoked a rise an inflation rate (Appelabaum, 2016). The rise caused the unemployment rate to go high, and many people happened to change their jobs. The announcement made many people be speculative and increased the urge of moving to new jobs. The Open Market Committee in Washington helped in implementing the strategy.

How long will Fed keep rates steady? By The Economist

A constant interest rate has been of concern to many US investors especially in the stock markets. With continuous insights that interest rates might fall has made the government increase its external borrowing (The Economist, 2016). Escalating external borrowing by the government has put many investors at stakes because of a foreseen rise in inflation rate. However, the government has enacted a monetary policy that saw the employment opportunities increase. Due to expected inflation, the Fed has decided to maintain a steady interest due to weak economic growth. The latter has provided a chance for GDP to stall and increase in the employment rate.



References

APPELBAUM, B. (2016). Fed Slows Down on Plans to Pursue Interest Rate Increases. The New York Times, [online] p.1. Available at: https://www.nytimes.com/2016/03/17/business/economy/fed-interest-rates-meeting.html?_r=0 [Accessed 27 Mar. 2017].

Blanchard, O., Cerutti, E., & Summers, L. (2015). Inflation and activity–Two explorations and their monetary policy implications (No. w21726). National Bureau of Economic Research.

Blanchard, O., Ostry, J. D., Ghosh, A. R., & Chamon, M. (2015). Are capital inflows expansionary or contractionary? Theory, policy implications, and some evidence (No. w21619). National Bureau of Economic Research

Ramtharan, G., Jenkins, N., & Ekanayake, J. B. (2007). Frequency support from doubly fed induction generator wind turbines. IET Renewable Power Generation, 1(1), 3-9.

The Economist, (2016). How long will the Fed keep rates steady?. [online] p.1. Available at: http://www.economist.com/news/finance-and-economics/21697859-how-long-will-fed-keep-rates-steady-dc-holdem?zid=295&ah=0bca374e65f2354d553956ea65f756e0 [Accessed 27 Mar. 2017].