MECHANISM OF PRINTING MONEY

MECHANISM OF PRINTING MONEY

                

 Article by Management Minds

   As a child I have wondered a lot why government does not print money in such quantity so that it can eradicate the poverty from the country and I think many of still have doubt and curiosity to know about the mechanism of printing money. So, we will try to explain it in simple term.

WHAT IS MONEY?

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in given socio-economic context or country.

     

       So why cant we print money in a quantity we wish and repay all debts and buy whatever we wants and everyone is happy???????

      

  The reason is this:-

                         

     As in the  figure we can determine that how value of money, price level and quantity of money is related with each other. As quantity of money increases value of money decreases and price level reaches to its peak the Situation is termed as inflation.

Let us have an example:-

Say, a country has a total produce or goods worth $1 Million. And, the country's monetary authority (The central bank) decides to increase the money supply, say double the money in circulation. This means that everyone's wealth is now doubled. This means that everybody can afford more i.e. they can buy double of what they were buying previously. So everybody will want to spend their money and buy stuffs (Rise in Demand). But remember, the total produce of the country is still $1 Million. So, the producers realizing that everybody is going to buy their products will exploit this opportunity to raise the prices resulting in overall price rise or Inflation. i.e. An economy which was worth $1 million is now worth $2 million, even though the total number of goods is still the same!

So you see that printing more money might make people richer but it will also make goods more costlier that People getting rich will be just be an Illusion and nothing else!

This also will lead to a fall currency value. How?

Say initially, the exchange rate of the same country was $1 = 10 units. But now, everybody has more money (Thanks to extra money printing!) but the amount of $ is still the same. So, the $1 = 15 units(say) which means the country's currency has weakened. You will have to pay more units of currency to get $1 than you earlier paid.

This can cause unemployment. How?

Since prices have risen all over, consumers will now not be able to manage the households with their current salaries( As you can see, salaries don't rise without a good appraisal cycle!) ad hence, they will demand for more wages. The firms and offices will not be able to meet the rising demand for wages and start cost-cut measures by laying off workers!

CONCLUSION

All of this will in turn will slow down the economy!

The other most important factors are GDP (Gross Domestic Product) and GNP (Gross National Product) and  So you see, Its a full cycle and that's why Central banks have to be careful on increasing or decreasing the printing of money.

SOURCE AND DETAIL INFO