Ok, please read this post with a grain of salt and don’t kill me for not even knowing the abc of economics.
I wonder sometimes when there is a shortage of money or not enough money for the government to pay it’s employees, why don’t they just print some more money?
Someone told me it’s tied to the amount of gold the country has in reserves. They can’t print more money than the value of that gold. So, I ask who is keeping an eye on this .. I mean on the international level? Do the countries who go by the gold standard publish data on how much gold they have in reserves?
Then someone told me the gold standard is almost extinct. So .. then how does it all work?
I know, I know, I will get bashed right & left. But heyyyy .. Allah bless gupshup for giving me the opportunity to ask these dumb questions. And no, I didn’t even take ONE economics or business course in college.
Though from what I studied long back.. one can only print money with relative to foreign reserves and assets and countrys ability to pay short term debts and its liquidity a country publish more than its worth.. currency value will go down ..if currency a country print is a obligation of treasury.. as its full face value it has to fulfill.. and currency is usually tied with any foreign strong currency for base line like ruppee ties to dollar etc. dunno am making any sense here
AJ, yes the Gold Standard has long been abolished for the rupee. What we had in the recent past (before the forex reserves stablized) was a hybrid system where the parity of rupee was pegged to a stable currently like dollar.
Reserves are necessary to maintain the parity of a currency to the strong currency (dollar in this case). Quite simply, if the rupee value begins to slip, the government can buy the local currency by selling dollars in the domestic market-this would stabilize the exchange rate.
As degas explained, the money supply in an economy is a function of a country's forex reserves and it's ability to honor its short-term obligations (plus a couple of other factors that have slipped ma mind :o). With a strong forex reserve base, the exchange rate can be kept within check as explained above...although in a true market-based economy, the exchange rate floats freely in accordance with the demand and supply of individual currencies.
For all practical purposes, a country simply cannot default on its domestic obligations coz more money can be printed as you said-its in the context of a nation's foreign payment obligations that the money supply assumes its due importance.
The central bank uses instruments of its monetary policy to regulate the money supply in the system. Based on various classifications, the money supply is broken up into components like M1, M2 and M3. Baqi bataon ga to bore ho jao gae! :p
Just expanding on what waleed said, you're gonna end up experiencing hyper-inflation if you try and print more money. Weimar Germany in the 1920s tried to alleviate its economic woes through printing more money, and ended up with a situation where money itself was virtually worthless (you had to take a wheelbarrow full of cash to buy a single loaf of bread) and people preferred a barter system.
Essentially, if you artificially increase the size of your economy through printing money, the consumer spending will rise, and prices will increase in response (as demand for the products/services in an economy rises, so will price) - you get inflation.
That's why most western countries have independent central banks such as the Federal Reserve and the Bank of England. If the government tries to print more money to artificially grow the economy, the banks will raise interest rates to restore the size of the economy to its natural level (higher interest rates mean people will save rather than spend). In this way, the central bank will counter the government's policy and avoid inflation.
Of course, higher interest rates are generally not favourable to the government, so the government will very rarely attempt to simply print more money.
Since money is just a legal tender (or a medium of exchange) rather then a resource like goats or cows (in the good old days of barter), it needs to assigned a value . Not the value you see on the currency such a $100 but actually what resources are worth such as $100 buys me 10 cds. now in the old days it was tied to the value of gold so a certain amount of a certain money could buy a specific amount of gold. This was because gold is scare and limited hence someone could not suddenly dig up more pure gold and be willing to sell at a cheaper rate.
These days in the open market the exchange rates between currency sort of set this because a couple of currencies (generally the dollar and previously the british pound) are viewed as stable currencies (sort of like gold). Now when you suddenly print more money in actuality you are not increase the amount of resources available in the country just the amount of legal tender. That is assuming the gold standard was around, printing more money will not increase the amount of gold but it will increase the amount of money that can buy that gold. This causes people to be more willing to pay more money for the same amount of gold which basically is inflation and causes the value of the money to fall.
What really makes money stable and increase in value is the resources that a country outputs be it in the services sector or in the goods sector, cause that increases the amount of resources that are available for people.
hmcq made the most sense among all of you or his answer was directed towards a dumb person like myself, though I appreciate everyone’s input!
I have heard, more money = inflation, and vaguely have understood this theory. Though my queer mind still believes that in cases of crisis, without telling anyone, government can print a little more money .. and get away with it. I mean there is no one counting how many ruppees are around .. is there?
On a serious note, you guys said countries like Pakistan peg their currency with ‘stable’ currencies like Dollar or Pound. (1) How often do they change between currencies they have pegged. Like Pakistan Rupee is with dollar these days, if the dollar’s value goes down, will/can they move on to Euro? (2) If the value of the rupee had been pegged to dollar & the dollar had remained stable, then why there had been huge inflation of Pakistani rupee? (3) How does dollar stays stable (or close to)? Is it by keep growing it’s economy and good & services?
It’s not that people will count… but generally, demand for the goods & services will rise because people have more disposable cash (having been printed). Merchants will notice increasing demand starting to outstrip supply and will respond by jacking up prices.
^ Wouldn't it depend on how much money was printed? Because there are illegal or fake bills being printed everyday ... though they have relatively no effect on the economy. Right?
^ exactly. Keeping other things constant…the increase in demand would be directly proportional to the amount of additional money printed. Think of this in the context of the example that maddy gave for interest rates and money printed. Everything has to come to a natural equilibrium.
Forex reserves means foreign exchange reserves or reserves of foreign currency of a country. The higher the foreign exchange reserves, the stronger the economy is considered to be. Think of forex reserves as similar to the reserves of gold under the gold standard. As gold was/is scarce, so are the forex reserves. Generally forex reserves are kept in the form of stable currencies like dollar/Euro or GB Pound.
Hamare forex reserves $10.3 billion ke qareeb hain partner
u arent alone bhia.. i asked the exact same question to my uncle. and i dun even remember what he said 
no doubt.. if u are dumb then i m mahaaa dumb 
and get away with it. I mean there is no one counting how many ruppees are around .. is there?
