This is a question I always used to think on every budget session when I was in college
"Why won't the RBI just print the extra money and make up for that difference?" I used to ask myself secretly, too afraid to ask it out aloud.
I am sure you must have thought about this at-least once even if you are an Economics student or not!
Well the answer is simple. Let me try to explain it with a simple example:
Imagine a city like Mumbai with the population of only 100 people who eat 2 vada-pao's everyday (Yummy!) for ₹10. Now, RBI announces that they will print extra money and make it double the current circulation and distribute it to everyone.
Hurray!
Everyone in your family is happy. You are happy. You always wanted that new iPhone and with the new set of extra money, you can finally afford it. To celebrate it, you go ahead and try to eat an extra vada-pao today.
Everyone in your family is happy. You are happy. You always wanted that new iPhone and with the new set of extra money, you can finally afford it. To celebrate it, you go ahead and try to eat an extra vada-pao today.
The vendor asks you for ₹15 this time. You are shocked!
You just ate it for ₹10 yesterday and so did everyone else. What happened?
You just ate it for ₹10 yesterday and so did everyone else. What happened?
In this scenario, the disposable income in everyone's hands has changed suddenly (double of what they had yesterday) but the production of vada-pao stayed the same. With more cash in everyone's hands, the demand for the vada-pao has gone up. So the vendor is now asking for an increased price which everyone is ready to pay for with the new cash in hand.
So in order to match the demand and supply, the production of money has to match with the production of goods and services to keep pace. This is also what is known in economic terms as 'Inflation'
So in order to match the demand and supply, the production of money has to match with the production of goods and services to keep pace. This is also what is known in economic terms as 'Inflation'
When people see the value of goods rising sharply over a short amount of time, they start to buy it in large quantities for the fear of more increase in the price i.e hoarding which ultimately leads to shortage of goods for everyone else.
Inflation is quite common over time in every country. When you hear someone saying: "When I was young, this set of biscuits cost only ₹2 and now it is sold at ₹10"; They are referring to an Inflation example.
So when RBI thinks of printing new currency, they have to think about Inflation, GDP and other macro and micro economic impacts it can have on our country.
And although it looks good on paper, Your country cannot survive the economy when you try to print your way out of a recession.
So it's not a really a good idea!
So when RBI thinks of printing new currency, they have to think about Inflation, GDP and other macro and micro economic impacts it can have on our country.
And although it looks good on paper, Your country cannot survive the economy when you try to print your way out of a recession.
So it's not a really a good idea!
