Monday, July 22, 2024

How Does Printing More Money Affect The Economy?

You must have thought why the government doesn’t print more money and solve the economic issues. Do you know the reason behind having limited money? How does it affect inflation? Let’s find out the reason and the effect of printing money.

Printing more money increases the money supply in the market, but economists consider it unhealthy for a country’s economy. The economics behind this is that if money flow increases, the price of the goods will simultaneously increase, which is why inflation occurs. 

Creates Havoc in the Interest Rates 

From a layman’s perspective, printing more money solves all the economic problems as it has value and the ability to buy goods. Also, more money supply means lower interest rates for us. You ask how? Let us look at an example.

When money is scarce in the market, to lend money to you, I have to reallocate that money from a different place, such as savings, investments, and other sources. In return, you also promise to pay a bit more to convince, such as by agreeing to pay higher interest. You accept a higher interest rate since you have few options because there isn’t much money being lent to people in the market. But when the money supply suddenly goes up, I can keep all my savings and investments where they are and still lend to you. Also, presumably, everyone else is giving out money to lend, so I reduce the interest rate to convince you to borrow from me.

However, this positive phase will last for a short period as other economic factors change the scenario. It is a temporary situation that may confuse people about the true interest rate and market situation.

Disbalances the Demand Supply Chain

Economists recognize its limitations when we consider the overall market response and its impact. From a consumer perspective, an increase in the money supply means that consumers have more money to spend on goods, which in turn drives higher demand for goods. However, because of the high rate of demand, producers sometimes raise the price of the same goods. In this manner, each unit of money loses value. This means that to purchase the same amount of goods and services, individuals will require more money, which will typically result in price increases and inflation.

Some of the countries whose currency value decreased as a result of printing more money are Indonesia and Vietnam. Today, if we compare their currency value with the Nepalese Rupee, it looks like this:-

1000 Nepalese Rupee (One Thousand)= 117954 Indonesian Rupiah (One lakh Seventeen Thousand Nine Hundred Fifty-Four)

1000 Nepalese Rupee (One Thousand)= 186389 Vietnamese Dong (One lakh Eighty Six Thousand Three Hundred Eighty-Nine)

Dependable Factors

The general well-being of an economy determines how printing money affects inflation and economic growth. Printing money can increase the chances of inflation if the economy is already expanding quickly. Nonetheless, printing money can help in promoting growth in an economy that is experiencing a recession.

The effect also depends on how the printed money is used. Allocating funds to productive projects like infrastructure or education is more likely to result in sustainable growth. However, if the funds are utilized to finance wasteful spending, such as higher government consumption, inflation is more likely to result.

The competency of the government also affects the impact of money printing. If the government has a track record of handling its finances sensibly, people are more inclined to believe that the funds will be spent wisely. However, if the government has a track record of printing money to pay down its obligations, people are more likely to forecast inflation.

In The End

Balancing the Money Supply is very important for a country’s economy. As the supply of money increases, the value of money decreases. As informed citizens, it is essential to understand the impact of economic decisions and how they can affect a country’s businesses and personal lives. While printing extra money seems like an instant solution, it can have long-term consequences.

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