The primary objective of increasing the money supply in the economy is to benefit the entire economy and ensure optimal operation. To ensure the optimal functioning of the economy, any increase in the money supply should be approached with caution, with the ultimate goal of benefiting the entire economy. Therefore, it is important to exercise restraint in reducing the reserve ratio and printing more money.
While increasing the money supply can potentially lead to benefits such as increased output, improved competitiveness of exports, and a boost in domestic real income, it can also result in negative consequences such as currency devaluation. Typically, this devaluation leads to a depreciation of the currency which can have far-reaching implications, including increased inflation.
As a result of currency devaluation, inflation will increase, which will cause the prices of basic commodities to rise and reduce the purchasing power of the country. This will have a negative impact on consumers, as they will have to pay more for essential goods and services with their reduced paychecks.
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Furthermore, currency devaluation can discourage investment in bonds and currencies, and make it difficult for the country to import goods and services from other countries. If these imports do occur, importers and producers will pass on the higher costs to consumers, resulting in a "cost-push" inflation that could trigger a wage-price spiral, as warned by McCallum in 1999.
As a result of currency devaluation, market inefficiencies may arise, making it difficult for companies to make long-term budgeting plans. Inflation can also decrease company productivity, as they may focus more on profit and loss as a result of currency inflation and neglect products and services.
Another reason why increasing the money supply and currency devaluation should be discouraged is the potential reduction in foreign direct investment. Many international investors may be hesitant to invest in the country due to the unfavorable conditions brought about by currency devaluation.
Increasing the money supply in the economy should be approached with caution, as the primary objective should be to benefit the entire economy and ensure it functions optimally. Printing more money and reducing the reserve ratio should be avoided unless necessary.
While increasing the money supply may boost domestic real income, output, and export competitiveness, it can also result in negative consequences, such as devaluation of the currency and increased inflation. Inflation, in turn, reduces the purchasing power of consumers, discourages investment, and makes it difficult for the country to import goods and services.
Currency devaluation can also lead to reduced foreign direct investment, limiting opportunities for local firms to explore new markets and increase their income and profits. Additionally, the government may experience a loss of revenue from foreign direct investment, and domestic companies may have fewer opportunities to increase employment for citizens.
In light of these negative consequences, it is advisable for the government to focus on promoting other key areas such as improving infrastructure, creating better incentives for local and foreign investment, and adopting prudent fiscal policies to stimulate the economy and maintain an optimum level of money supply.
McCallum, T. (1999). Monetary Economics. New York: Macmillan
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