Money, Value and Monetary Policy

This assignment delves into the crucial role of money as an exchange medium and its impact on economic stability. It examines the concept of money supply, its value, and liquidity, emphasizing the government's influence through monetary policy. The text highlights the interplay between interest rates, investment, inflation, and household expenses, illustrating how these factors are intricately linked.

GLOBAL ECONOMIC ENVIRONMENT
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Table of Contents
Task 1....................................................................................................................................................3
Task 2....................................................................................................................................................3
Task 3....................................................................................................................................................3
Task 4....................................................................................................................................................4
Task 5....................................................................................................................................................4
Task 6....................................................................................................................................................4
Task 7....................................................................................................................................................5
Task 8....................................................................................................................................................6
Task 9 ...................................................................................................................................................6
Task 10..................................................................................................................................................6
Task 11..................................................................................................................................................7
Task 12..................................................................................................................................................7
References............................................................................................................................................8
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TASK 1
The size of economy can be measured through Gross Domestic Product and the formula has
been mentioned in the below section. GDP is the value of output produced by domestic firms
through using resources. Use of national income information is vital for the business to comprehend
the overall level of demand in an economy (Armendáriz and Morduch, 2010). It is also a key
ingredient in formulation of various business strategy. Higher income does not mean that country's
resource capability is better; however in such respect income distribution needs to be taken into
account. Hence, real level of income needs to be taken into account to take relative price inflation
into consideration.
(GDP) Y = C + I + G + NX
TASK 2
Government spending reflects the flow of income in different counter parts and spending in
infrastructure is a key government tool that depicts the effects of recession. Infrastructure has
effects on the overall competitiveness of the nation; however it is also an alternative strategy that
reduces taxes in state benefits (De Grauwe, 2014). Government has been investing in such projects
so as to manage aggregate demand and aggregate supply. Aggregate demand is the quantity that
people want to buy in given price level; however aggregate supply is the quantity which firm sells
at a subsequent price level. Since, government spending is a part of GDP; therefore it enhances
marginal propensity while consuming the goods and services.
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TASK 3
The government of UK has been using fiscal policy for the purpose of determining how
much taxes and subsidies the business entities have to pay in different types of trade. It represents
government spending in different projects because government comprehends influence of economic
cycle that moves from economic boom to economic recession (Griffiths and Wall, 2008). It is
mainly used by the government for revenue collection; however on the other side, expenditure
influences the economy abruptly. For example- the economy of Kenya has raised question on
effectiveness of fiscal policy. The government in such respect stated that monetary policy is
comparatively better than to fiscal policy because it considers inflationary beneficial.
TASK 4
Money is exchange for goods and services as it is a medium through which several products
can be produced. In order to regulate the flow and supply of money, government has framed
monetary and fiscal policy which defines the action taken by central bank to affect the money
supply (Akerlof and Kranton, 2010). The major two aspects of monetary policy is changing price of
money and changing physical amount of money available. Most of money is held in bank deposits
which they use for the purpose of lending it to others through interest rates. Further, banks also
maintain liquidity ratio through emphasizing on reserve ratio.
TASK 5
Unemployment is typically a condition in which people do not have work even if they are
capable in managing work. In UK, the level of unemployment is measured through a Labor Force
Survey which is conducted by International Labor Organization. Government needs to control the
level of unemployment so that economic prosperity and standard can be raised (Knox and Marston,
2014). Hence, in order to control inflation, the government has developed “Supply side policies”
which are designed to increase the supply of labor with more attractive work. It also reduces income
tax and increases government expenditure on education and training. The policy also aims to
increase national output through generating various opportunities of employment. Further,
government reflationary policies also leads to negative effects which could become counter-
productive for reducing unemployment. The reforms specifies the state benefit system to make
work more attractive instead of claiming the beneficial aspects.
TASK 6
Government can control the rate of inflation through trading with other countries for
absolute advantage and for comparative advantage. Tariffs and Import Duty should be determined
as per the imported goods. For example- “Big Mac Index” which consider prices of different
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countries and then it evaluates price variations.
US 4.79
Switzerland 6.82
UK 4.51
China 2.74
Russia 1.88
Government needs to control the level of inflation due to various costs concerned with high
inflation rates. Rise in prices can be controlled through using monetary policy tools (Nordhaus,
2010). In the country like UK, the target can be achieved through inflation rates agreed with the
Bank of England. Hence, in such respect Central Bank needs to keep inflation under control through
money supply and interest rate. Firms need to become reluctant to invest if inflation leads to greater
uncertainty about future prices and operating cost of the industry. Moreover, there should be
minimum holding of cash so that it can reduce risk aspects and this might also increase number of
transactions with banks.
TASK 7
Foreign trade includes import and export aspects and how it helps the economy to grow. In
such respect, the government measures both imports and exports and the combination of both the
concepts helps in getting value of Balance of Payments. It is further broken into current account,
capital account and financial account (Pesaran and Pesaran, 2010). Exchange rate simply defines
how much one currency can be purchased with another. From the views of many scholars and
authors, exchange rate is considered as a measuring system because it includes overall standard of
the country. Most of the countries do not comprehend their own resource power and as a result,
many imports are sold through importing country's retail sector for future maintenance. Hence, it is
crucial for the government to look upon the policies so that it does not over influence the exchange
rate. However, the main issue is that there are several players in the industry that win and lose in
terms of exchange rate fluctuation. For instance- depreciation placed on pounds against other
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countries has influenced those business entities who import more services into UK.
TASK 8
PESTLE analysis is useful in terms of identifying macro political and micro political risks
that affects all the firms and sectors as a whole. However political risk improves relative bargaining
power and it also restrict exposure to government influence. Economic factors emphasizes on
economic growth, interest rate, exchange rates and inflation and it affects firm's markets through
focusing on sovereign risk (Schumacher, 2011). Economic factor considers current exchange and
interest rate and how it impacts purchasing and capitalization policies of businesses. Political
environment helps the multinational companies to ascertain stability of the country along with its
taxation power. Moreover, legal environment chiefly analyzes the legislative impact on labor
market. Similarly, it also gives information about country's legal system. Socio-cultural
environment determines local taste and preference of people so that business can adopt suitable
modes of selling the products appropriately at market place. Hence, all such factors helps the
countries to confirm their product through giving the label of patent (ownership).
TASK 9
Multinational company always trades with various countries with a regional headquarter in
one specific country. Global strategies are useful for high cost competitiveness but low
responsiveness pressure. For instance- one product is serving to large number of markets without
emphasizing on differentiation aspects (Sentance, Taylor and Wieladek, 2012). The firms also
emphasizes on cost factor through economies of scale. Transitional strategy is vital in the case when
cost competitiveness is considered significant for bringing the product in local market. The head
office posses all the controlling power; however the main issue is government taxation in both the
countries where business is operating. Further, Multi-domestic strategy tends to involve
multinational companies in allowing local subsidiaries to accelerate flexibility valuable activities.
One of the chief strategies associated with this MNCs is International strategy which is suited to
firm who do not experience cost competitiveness and local differentiation facets. The strategy
ensures that multinational companies have high control on its value chain. This is potentially the
most problematic situation for host country.
TASK 10
Trade is significantly desirable due to the theory of comparative advantage which is given
by Adam Smith who stated that firms and countries should emphasize on getting absolute advantage
for producing goods and services at lower cost. In order to contradict this, David Ricardo argued
that the country who is specialized in a particular product can have comparative advantage over all
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other countries who produces the same goods and services (Sloman and Sutcliffe, 2007). This also
gives overall trade benefit to both the countries because of same products and services. In such
respect, the country can obtain comparative advantage through demand conditions and factor
conditions. According to firm's strategies and rivalries, the organization can analyze the degree of
competition in the market place and through this, relative comparative advantage can be acquired.
Comparative advantage can be acquired through strategically placing the industries in home
countries where more opportunities of employment exist.
TASK 11
Mansion tax is regarded as a prominent example of direct tax and it should be paid to the
local council (government). It is not related to the level of household income and it should be
regarded as justifiable because it enhances purchase parity of people (Tisdell, 2001). There should
be equal taxes for the people who live in big houses and who are comparatively more rich. Mansion
tax must be economic and it should be placed while defining taxation on property. Further, it needs
to be transparent so that people can comprehend all the reasons for which they are paying tax. For
instance - the relative value of money can be understood in the case when a person sells his own
property. Mansion tax is convenient as well because people find it easy to pay. Payment of tax on
houses is convenient since it is paid by the owner at the time of billing the property.
TASK 12
Money is considered as one of the major source that is used in exchange of debt. It is
measured in terms of its value and liquidity state. Monetary policy includes the value of money
since it aids the government to control the level of money in the economy. In order to increase the
liquidity position of banks, supply of money should be controlled through government actions.
Monetary policy of UK sets interest rates for public so as to manage the flow of money (Venugopal,
2006). There is a reciprocal relationship between quantity of money and value of money; hence
government should be very much concerned about the effects of inflation while increasing the
supply of money. Interest rat directly influences price and availability of money because high
interest helps in more saving and low interest rate facilitates more investment. Price and availability
of money has direct relationship with inflation situation; however interest rate might have huge
effects on family expenses.
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REFERENCES
Akerlof, G. A., & Kranton, R., 2010. Identity economics The Economists' Voice, pp. 7(2).
Armendáriz, B., & Morduch, J., 2010. The economics of microfinance. MIT press.
De Grauwe, P., 2014. Economics of monetary union. Oxford University Press.
Griffiths, A. and Wall, S., 2008. Economics for business and management, financial times prentice
hall.
Knox, P. L. and Marston, S. A., 2014. Human geography: Places and regions in global context.
Pearson.
Nordhaus, W. D., 2010. Economic aspects of global warming in a post-Copenhagen
environment. Proceedings of the National Academy of Sciences. 107(26). pp.11721-11726.
Pesaran, B. and Pesaran, M. H. 2010. Time Series Econometrics Using Microfit 5.0: A User's
Manual. Oxford University Press, Inc..
Schumacher, E. F., 2011. Small is beautiful: a study of economics as if people mattered. Random
House.
Sentance, A., Taylor, M. P. and Wieladek, T. 2012. How the UK economy weathered the financial
storm. Journal of International Money and Finance, pp. 31(1), 102-123.
Sloman J. and Sutcliffe, M., 2007, Economics for business, Financial times prentice hall
Tisdell, C., 2001. Transitional economies and economic globalisation: Social and environmental
consequence. International Journal of Social Economics. 28(5/6/7). pp.577 – 590.
Venugopal, K., 2006. Business Economics. New Age International.
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