1.5 The Supply of Money Copy

 

You must have wondered, who prints these currency notes, how much money is printed, and how they reach us?

The Reserve Bank of India (RBI), the central bank in the Indian banking system, can print and distribute currency notes in India. The Indian Government manufactures coins in consultation with the RBI. The Indian Government and the RBI work together to determine the extent of India’s money supply. For distribution, the RBI sends freshly printed money to the banks. The banks then distribute it among the people conducting financial transactions through them. We will explain banking in detail later.

So, why can’t the RBI print enough money that everyone is rich? Wouldn’t that solve all our problems? Unfortunately, it wouldn’t.

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Let us understand with this example. Suppose there are ten people in country A.  Each person is earning rs—100 per year. Country A produces 1000kg of apples per year. The cost of 1 kg of apple cost is 10rs. Now the RBI of country A printed more notes. Each person’s income now becomes double, i.e., 200 rs p.a. Now people can buy anything. However, the production of apples remains the same. So, the sellers will increase the price of apples from rs 10/ kg to rs. 100/kg to reduce the demand. This situation is called inflation. To boost the economy, printing more money is no solution. One should increase the production of goods to boost the economy. 

 

 Illustration 1.14 

The gold reserves, government securities, and foreign currency reserves back The country’s total amount of money. Thus, the total money supply cannot exceed the total amount in these items. In other words, an unlimited supply of money is impossible.

So, should the RBI print very little money? The answer again is a no. Less supply of money would lead to significantly less spending. The consequence of that would be lesser development. If nobody can buy even a small car, why would we need roads? Lower economic growth will lead to the opposite of inflation, which is a recession.

Therefore it is crucial to regulate the flow of money in an economy. In short, money will be a suitable medium of exchange as long as it represents the relative value of goods and services reasonably. Regulating the money supply in the country is a role balanced very well by the RBI.

 

THINK ABOUT IT! 

Have you ever seen the RBI building in Delhi? 

Can you guess how many hands your 10 rupee note in your pocket must have passed and then reached you?