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Old 20th April 2006, 15:05   #1
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Default All about printing money

Reserve Bank of India decides the volume of the currency that needs to be printed both for reserve and replacement. Reserve will be based on the economy growth rate. Can anyone throw more light on this i.e on what basis the they derive these things.

Its the human being who introduced the concept of money for convenience & to get equalient value of money for all the transactions as money can be exchanged for our needs. But many of the human beings fell into this money trap and run behind it. Whats are the impacts if Govt overprints the money?

Any ideas on the above?



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Old 20th April 2006, 15:30   #2
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Go to an ATM- they give more Rs 100 than Rs 500 there fore you take less and spend less

however credit and debit cards make a mockery of all this.

Anyway our ex-mumbai bhai's are also good printers so I hear
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Old 20th April 2006, 15:34   #3
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An extreme consequence of overprinting money would be what happened in germany after WW1 i.e hyperinflation. The govt. simply printed money to pay the winning side and as aresult people's life savings became worthless overnight and they had to pay a wheelbarrow full of money to buy bread!
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Old 20th April 2006, 15:50   #4
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Read Macro-Economics... .. B.Com Honours.. 3rd year.... that says it all.
Though I have forgotten by now.
Search around... the web.... try the RBI site http://www.rbi.org.in/home.aspx
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Old 20th April 2006, 15:51   #5
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Quote:
Originally Posted by ajmat
Go to an ATM- they give more Rs 100 than Rs 500 there fore you take less and spend less
I didnt get this.. wont the banks want you to spend more?? Spend more so that you run out of money soon... and then go back to the bank for taking debt??

By the way, i have noticed that ATMs give 100 rupee notes only when they run out of 500 rupee notes.

Anyways, the paper money is basically a promise by the government to redeem the currency with some other form. So overprinting of money literally translates into promising something that you cant deliver. Thats not a good thing when u have to deliver on that promises every time money changes hands.

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Old 20th April 2006, 16:00   #6
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Quote:
Originally Posted by amitoj
Anyways, the paper money is basically a promise by the government to redeem the currency with some other form. So overprinting of money literally translates into promising something that you cant deliver. Thats not a good thing when u have to deliver on that promises every time money changes hands.
Yes.. so that basically translates into..... the fact that
you have more money in the economy than the value of commodities/ services ( i.e. GDP) that money can buy. So that would translate into shortage of commodities and then inflation ( + all the bad market practices).
So the poor would suffer a hell lot... as they won't be able to cope up with inflation and would be deprived of basic needs.

EDIT: So today its related to GDP.... and earlier it was related to the amount of gold a govt. had in possession. The gold also decided the ForEx rates.

Last edited by SLK : 20th April 2006 at 16:03.
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Old 20th April 2006, 16:59   #7
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Ahh..finally figured it out. Most central banks rely on the quantity theory of money which is basically a formula MV=PY

M=money suppy
V=velocity of money
P=price level
Y=National income

So if price level and velocity are assumed to be constant the money supply should increase at the same rate as the National Income/GDP.
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