Saturday, 28 February 2015

Why we don’t Print More Money

Have you ever thought why can't a country print money? Well, there is a reason behind it. Here are some important reasons as to why a country can't print more money.
Why we don’t Print More Money

1. Supply of money is inversely proportional to supply of goods

If the monetary authority of the country, i.e. the Reserve Bank, decides to double money circulation, then the increase in the supply of money will lead to a decrease in the supply of goods. Example: If our country produces goods worth 5 million rupees and the Reserve Bank decides to double money circulation, then this will in turn double the wealth of the citizens. When the wealth is doubled, citizens can afford more and they can buy more products. As a result, the demand will increase. However, only the supply of money has been doubled, the produce is still limited. Therefore, there will be a shortage of goods compared to the demands of customers and the amount they are ready to splurge.

2. Inflation
Another factor which comes into the picture is inflation. Now, when the money supply has been doubled and the produce is limited, producers and retailers are left with only two options: (1) Increase the produce (which is rare) or (2) increase the prices of the goods. They mostly go for the latter, and thus, this phenomenon of increase in the prices of goods because of huge demands is called inflation.
So, now when the prices of the goods are doubled, the 5-million economy turns into a 10-million economy. In short, nobody gains from the extra money. Thus, printing more money does not make any difference in the economy; in fact, it may create instability in the economy.
3. Fall in currency value
Suppose the exchange rate of the country is 20 units for $1. After money supply is increased, it may go up to 25 units for $1 as everybody has more money. However, the value of the rupee is still the same, and thus, you will pay more units of currency to get $1. This weakens the value of currency.
Thus, to encourage a stable economy, increasing the supply of money is not advisable.