Why not just print more money?

What is money?

Money is a legal tender which is a consideration for buying or selling the product or services. In case of import and export to the other countries the value of our currency is regulated and measured viz-a-viz the currency of the other countries depending upon the economic strength of the respective countries depending upon the economic strength of the respective countries. The conversion method is known as the exchange rate.

Importance of money:

The customer cannot buy any product without spending money. To regulate the supply of money the government of the country is having a central bank which also performs the role of printing and supply of the currency.

 Regulated authority to govern money market:

The supply factor is always kept in view by the government to control the prices. The supply of money as well as the credit policy is regulated by the central bank according to the economic policy of the government of the country.

Wouldn’t we all be wealthier if we printed more money?

The value of money is the purchasing power it has. In case the money can buy more goods its value will be higher and vice-versa.

If we print more money and that money reaches the consumers, the value of money will go down because it will have the same goods available in the market as were available before printing extra money. This will have the impact of price rise and we are no better of them we were before. The money in case diverted towards the increase of the capital goods will have the impact to improve the gross domestic product of the country. Therefore the purpose for which the extra money is printed matters a lot in determining the value of the money. In short the prices will go up after a drastic increase in the money supply because:

·        If people have more money, they’ll divert some of that money to spending. Retailers will be forced to raise prices, or run out of product.

·        Retailers who run out of product will try to replenish it. Producers face the same dilemma of retailers that they will either have to raise prices, or face shortages because they do not have the capacity to create extra product and they cannot find labour at rates which are low enough to justify the extra production.

We have therefore to understand the value of the money in terms of its demand and its impact on the prices. We can conclude that the price rise and the inflation is caused by four factors as under:

·         The supply of money goes up

·         The supply of goods goes down.

·         Demand for money goes down

·         Demand for goods goes up

The printing of extra money without regulating its end use will cause prices to rise. If the supply of goods increased enough, factors above could balance each other out and we could avoid inflation. Suppliers would produce more goods if wage rates and prices of their inputs would not increase. However, we have seen that they will increase. In fact it is likely that they will increase to such a level where it will be optimal for the economy to produce the amount it would have if the money supply had not increased.

Conclusion:

This gets us to why drastically increasing the money supply on the surface seems like a good idea. When we say we’d like more money, what we’re really saying is we’d like more wealth. The problem is if we all have more money, collectively we’re not going to be any wealthier. Increasing the amount of money does nothing to increasing the amount of wealth. Since the same number of people are chasing the same amount of stuff, we cannot on average be wealthier than we were before.

Submitted to- prof. Gurdeepak singh

Submitted by- monica gupta