The prices of goods have a direct influence on the nominal gross domestic product. A reduction in the prices of goods reduces the nominal GDP. The nominal GDP from1990 to 2005 was lower as compared to that of 2006. It is an indication that the prices of goods increased in 2006.
| 1990-2005 | 5,848.8-12,766.1 |
| 2006 | 12,053.1 |
The real gross domestic product is inversely related to the average growth rate. An increase in real GDP leads to a reduction in the average growth rate. The real GDP in the1990s to 2005 was low but the average growth rate increased by 1.18%. However, the real GDP increased in 2006, but the average growth rate decreased. The actual gross domestic product has a direct relationship with the inflation rate. An increase in the actual gross domestic product increases the inflation rate. From1990 to 2005, the real GDP was low while the inflation rates were low at 2.42 %. The inflation rates increased to 4.8% with an increase in the real GDP to 10,760. Alternatively, the average growth rate has an inverse relationship with the inflation rate. From 1990 to 2005, the growth rate was high, but the inflation rate was low.
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Average growth rate= [Beginning value/Ending value]-1
Average Growth Rate | |
| 1990-2005 | 0.1182985 |
| 2006 | 0.0816636 |
Average Inflation Rate | |
| 1990-2005 | -2.42 |
| 2006 | 4.8 |
Average inflation rate= [Beginning/Ending] Money growth rate^ 1/n -1
Average real GDP= [Beginning + Ending]/2
Average Real GDP | |
| 1990-2005 | 9,162.6 |
| 2006 | 10,760 |
The expected inflation in 2006 is 4.8%. The increase in inflation rates from 2% to 4% indicates the volatility of the economy which is excluded from the normal inflation. It illustrates the gap between consumer spending and the supply of products in the economy. The demand in the economy is low which results in a reduction of the investors’ interests. However, there is a reduction in the prices of goods in the economy which may discourage investors from making investments.
An increase in the price of goods causes a shift in the supply curve. As a result, the real gross domestic product decreases. The consumers will be discouraged to purchase the products. Subsequently, the equilibrium will shift causing instability in the market.
Loanable funds have a high-interest rate. The demand for loanable funds has an indirect relationship to the interest rates. A reduction in the demand for loanable funds results in a high-interest rate. The banks will demand more money in case the Federal Reserve lowers the interest for loanable funds. The demand for withdrawal of deposits will also increase.
Money supply is directly related to the inflation rates. An increase in money supply increases the inflation rates. The graph below indicates the positive relationship between money supply and inflation. There is a positive correlation between money supply and inflation. Money supply increases with the inflation rates. However, there is a difference in the tear 1990 to 1995 because the inflation rates adjust at a slower rate.
The inflation rate has a direct relationship with money growth. A quick growth of money is related to inflation. The growth of money reduces the value of the currency which increases the prices of goods. As a result, the economy experiences inflation.
