Monetary Control in a Changing Financial Government - Essay Example

A certain government has the right to have its own currency. By doing so, it opens its doors to the world economic scenario. This would mean that their currency is available for the exchange of other currency that is much recognized by the world market in purchasing goods and services. With this, the economy of a certain country now depends on how its currency can fare up with other currency. In short, most of the economies of some countries depend on how their currency is doing. If their currency has a lesser value, then the economy of that country is somewhat facing a big problem in addressing more goods and services which may not be available on their country and will need to acquire from the other land. In. order to compensate with the needs, they have to buy currencies which are more recognized in the world and with this, they need a larger volume of their monetary resources in which they will have to spend tremendous amount just to meet or purchase a certain currency. By doing so, the value of their currency will be more likely affected and it may cause sudden change of the prices of basic goods and commodities. To add to that, if they do have a lesser monetary value, that certain country might resort in money in some monetary agencies in both local and international. Having this practice will ease or lessen the burden of a certain country with regards to their monetary scheme. However, if that certain debt would not be paid off immediately or given proper attention, then it would be another factor in weakening the value of a certain currency. The concerned country will further focus in paying off their debts and with this it will also need tremendous amount of money in terms of payment of the principal as well as the interest. If the concerned party would pay for their debts, it will need tremendous amount of money and the inflation rate would also rise, as the value of their money would be further weakened. The country and its government would now resort on schemes on how to raise the revenue of the country. Sometimes, the government would resort to another loan in order to pay their debts and compensate the needs of their constituents. With this, they would more likely produce a cycle called debt trap. This would mean an endless cycle of debt or loan in order to pay for the previous loan. If this happens, the economy of that certain government would face stagnation in which their economy would rely on loans and debts made by the government. The question is, if there comes a time that this government would not be able to lend a new one, how would they be able to pay their obligations and deliver the needs of its constituents. Then, it would be more difficult for that government to establish the stability of its currency. With this, it would more likely to produce another inflation and will lead to another depreciation of the value of their currency. Also, this would also mean that they would fail to pay their current obligations and with this they not be entitled for future loans in some international monetary institutions and this would really mean a serious problem. During these stages, prices of basic commodities will rise as prices in producing goods with the use of electricity, manpower, raw materials and the likes would also have their own highs and this would really mean a serious problem for that certain country. If the cost of production were high, then the burden would also be passed to the consumer, which will affect the prices of goods. Prices of transportation, communication and some related industries would not be spared in encountering such a scenario. This would also mean that the workforce would demand for higher wages to compensate their daily needs in which sometimes lead to closure of the industries or field specialization that they are working. Without further production then there would be a little source of income for the country, there would be less tax payers, and will affect the revenue collection of the government. With this, the government would be pressured to sell or privatize some of its properties and controlled corporations in order to produce more revenue. Upon doing so, the buyers of those properties which is now the new owner could have the luxury of dictating their desired prices in goods and services. Upon having this scenario, the value of their currency is once again affected. This would further affect the performance of that currency when it comes to faring up with the world market. This would more likely mean that the country would need voluminous amount of its money in exchange of a currency that is recognized by the international market. This event may deprive the aforementioned government to purchase goods and services, which are not available to the local country. The government would also face difficulties in importing products with regards to this. Also, they would find it hard to pay taxes, which are regulated by international institutions. If this thing comes, the government would have to make another adjustment and it pertains on how to uplift its revenues. The government would now impose new and additional taxes on goods and commodities in order to lessen its budget deficit and inflation rate. This would once again mean rise of goods and services. However, this move might lessen the inflation rate as the revenue of the government would go up and the value of their currency would somehow be strengthening because of this move. However, the government would not impose that scheme soon, depending on the country's type of government, it would be scanned through different deliberations and re-enactment of some laws in which would take tremendous amount of money. Also, most of the economies in almost of all of the countries of the world rely on taxes as their revenues. During the enactment of these laws would probably mean that they would have to take some measures while waiting for these laws to be enacted. They might resort into cost-cutting schemes and the likes in which it might affect the normal process of the economic arena in that government. There will also be uncertainties as to whether when that certain scheme must come to an end in order to normalize the performance of the government. However, there are claims that the intervention of the government is vital in determining the value of their monetary aspect in terms of manipulating some corporations and monopolizing some goods and services. There are also claims that the central bank of that country must produce money in order to compensate with the amount that they need in exchange for a currency that is more recognized by the world market. However, these things should not be done because if that country was found out by different monetary agencies in the world, they may face sanctions that would further affect the economy of the country. This means that different international monetary agencies such as the IMF or the International Monetary Fund and the World Bank would either give them a negative credit rating or the worst scenario here is they might be blacklisted and their currency would not be recognized in the rest of the world. If the government would try to produce more money above the prescribed volume depending on the economic situation and some matters including the GDP or the Gross Development Product, GNP or Gross National Product and the per capita income of that government, then it would only create problems such as the prices of goods and commodities needs voluminous amount of money such as a sack of money for a loaf of bread. Controlling monetary aggregates could change economic environment of a certain country and has also a positive impact in terms of economy. Financial development has improve according to Thornton (1982) " Several development policies affected the direction of monetary policy in 1981the liberalization of small ceilings certificate. the introduction of tax exempt and the rapid growth of money market mutual fund." Reference: Thornton, D (1982) The FOMC in 1981; Monetary Control in a Changing Financial Government. Retrieved April 24,2006 from http://research.stlouisfed.org/publications/review/82/04/Financial_Apr1982.pdf#search='controlling%20monetary%20aggregates' Read More