Thursday, March 22, 2012

Why Can't Printing More Money Make Us Rich?

Since, my early childhood I wanted everyone to be rich. I was aghast to be forced by mom into a bus that had no vacant seats!I usually thought what if everybody could buy a car, nobody would be forced to cramp into a already jam packed bus! For that we need money, all of us need big money! Whoever printed money, Why wouldn't they print as much as for all of us to buy a Car?

Many of us might have been confused by the same thing but in different situations in different ways.

I  found the answer.It was not my curiosity that led me to the answer. It was a mere coincidence.

So why don't the FED publish more money to make us rich?
We had a course named Engineering Economics, this semester.Now that the exam was over and afternoons were filled with slots of regular load shedding, I had nothing to do!Then i caught up with my sister's book in Economics ( i just wanted to cross check what was the difference between ours and their way of economics) and I read its preface. Luckily the preface was so well composed that it drew me into its content."I believe that everyone should study the fundamental ideas that economics has to offer..... You will be glad that you studied economics"These lines would make me look into whatever it had between its cover.

The first chapter, that of Principal of Economics, would end the age old curiosity. The Ninth Principal is titled as "Prices rise when the Government Prints too much money"!

So let me explain it to you in simple terms. When government prints too much money, people will have much money but the number of goods available in market would be the same. Like all of us had 10 lakhs to buy a Maruti 800 but their would be the same number of Maruti 800 in the market. The industries due to its limitation cannot fulfill the supply. Hence a sort of competion begins between customers to buy the car which makes it a more scarce commodity. Hence, the price of the Maruti 800  would adjust (increase sharply).This is known as inflation. Again, all of us wouldn't be able to afford the car and the persons who where earlier incapable of riding a Maruti would still be the same!

So we came to know, why printing money would not make us rich! But you may again think why do then government acts crazy and prints too much money creating inflation. There is a reason for that as well.

Let me carry on from above example. When people have more money, they will try to spend it. So,  people will want more of Maruti 800. Though the company can't satisfy all of us, it shall surely increase its production to whatever level it could to reap benefits of increased sales. Hence,to increase production of cars the company must hire more workers. Thus the unemployment would go down. Thus Inflation and Unemployment are inversely proportional to each other in the short term. At least most of the economist believe in this theory!

So next time if you ask God for  trees that have money instead of leaves, that is not going to work if everyone of us could implant that tree.

(The book i was referring to is "Principles of Microeconomics",Mankiw,4th edition,Cengage Learning,Indian Edition)

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