Money and its supply Free Essays

Increasing money in supply can lead to inflation where the general prices of goods and services rise dramatically. This erodes the purchasing power of a currency and the value of other monetary items. Moreover, this may create uncertainty among investors concerning future inflation and this reduces saving and investment. We will write a custom essay sample on Money and its supply or any similar topic only for you Order Now Lastly, inflation makes lending institutions to stop lending or charge high interest rates because of its declining value. Reducing money in circulation so as to curb inflation may lead to price decline of goods and services and consumers would horde out their money hoping that it will increase in value in the future. When consumers stop spending, movement of goods declines making businesses to make losses leading to unemployment. Borrowing becomes prohibitive since businesses are forced to spend more when servicing the debt. Government and stability of its currency The government can maintain a stable currency by ensuring that the monetary policy is effective and efficient. The exchange rate system should not be controlled and the movement of currency in and out f the country should not be restricted by the government. Both monetary and fiscal policies should be stable so as to ensure that the rate of inflation does fluctuate unnecessarily. This will insulate the legal tender from global economic shocks. The government can use fiscal policies by regulating spending and taxation to increase economic growth during low inflation and high unemployment, and lower it during low unemployment and high inflation (Hanke, 2003). Factors that would undermine a stable currency include regulation of the exchange rate of a currency or the movement of the currency in and out of the country. In addition, increasing money in circulation when economic growth is stagnant would lower the value of the currency and create inflation. Emerging economy and a wealthy country The law of comparative advantage argues that, nations can benefit from trade by engaging in trade even when one country lacks absolute advantage in producing goods being traded. For example, Mundania and Lalaland are two nations each producing both jackets and sandals. Mundania is efficient and produces 100 jackets and 140 sandal every hour compared to Lalaland who make 80 jackets and 60 sandals per hour. Mundania enjoys absolute advantage in production of both goods. Working 40hrs per week, both countries produce 180 x 40hrs = 7200 units of jackets and 200 x 40 = 8000 unit of sandals. However, if factor cost in production of jackets in mundania is more efficient compared to Lalaland, Mundania would concentrate solely in jacket production. The 40 hours spent in sandals production would enable production of 8000 jackets in Mundania per week. Moreover, Lalaland would concentrate on sandals production and increase production to 8000 per week. Jacket production not only remains stable but increases considerably because of specialization. Country ranking Kenya’s competitiveness has stagnated over the past year and several policies ought to be enacted to improve its performance. It has improved in its capacity to innovate through research and development and collaborating well the institutions of scientific research to those in business field. To enhance competitiveness, I would improve both the education sector and job training skills so as to increase the number of skilled workers. The country’s economy has reformed considerably with a considerable portion being sustained by the financial market due to increased access to loans and development of the stock market. This is in line with the findings of world Economic Forum (2009-2010) This sector needs more support through reduction of bureaucracies and enhancing transparency. Moreover, public institutions have been known to be inefficient as a result of corruption and this need to be addressed urgently. Anti-corruption agency should be established and given power to prosecute corrupt officials. I would also uplift the living standard of people by ensuring the health facilities are accessible to all and increase housing sector by seeking international aid to construct affordable houses especially in urban areas to avoid growth of shanties and overcrowding. How to cite Money and its supply, Papers