Economics - Simple to understand

Why not Government prints unlimited currency?

Govt. cannot print unlimited currency because its create inflation (purchasing power of money).

Example:

If a Book price is Rs.10/- and govt. supplied more money means to us then our purchasing power  increased i.e demand of book will increase while supply/ quantity of book is remain same, then price of book will increase because of demand. 

Other example, IN a remote village,  a shop is selling  a toy is Rs. 1000/- and have 25 pieces only, and in village has 50 children but only 20 children has Rs. 1000/- , 10 children has Rs. 800/- rest has Rs. 500/-; now only 20 children can buy this toy, a richman came in village and donate Rs. 300/- to each child, now increases the byer of same product (increase the demand). Naturally seller will increase the price of toy on other hand its increase the dearness. (Suppose government as a rich man, and children as citizen of country.)

So Govt. don’t print unlimited currency its increase the dearness (or reduce the value of money).

 A real life example:

In vegetable market, the seasonal vegetable price is low than unseasonal vegetable, because unseasonal vegetable quantity of supply is limited but customer are more than this. Now if government supplied more money to us then customer increased for that vegetable, while quantity of vegetable is remain same.  Now what will happen, Shopkeeper increases the price of vegetable means dearness increased.

è In year 1922 Germany, govt. printed too much currency and its collapse economics.

è Same happen with Zimbabwe in the 2000s.


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-----:Repo Rate:----

Repo represents the sort form of REPURCHASE. This is a financial instrument, when seller requires money, can buy back his/her financial instruments (bond, security letter etc.) from buyer.

Repurchase Agreement is the sale of securities together with an agreement for the seller to buy back the securities at a later date. Repurchase price should be greater than the original sale price. The difference of original sale price and repurchase price represents interest, some time called repo rate.

We listen or read in news that RBI (Reserve Bank of India) increased or decrease the REPO RATE, What is this?

Banks (ICICI, SBI etc.) sell their securities (financial Assets) to RBI to earn interest with the agreement to repurchase it, this is for very short period. RBI increase the Repo rate means banks get higher interest and vice-versa.

Another point BANK RATE, This is the rate at which central bank (RBI) lends money to other banks or financial institutions without any securities. Its for long term.

Now millions rupees question is; what is effects on common person.

If RBI increase Repo Rate means bank have to pay more interest to RBI, to cover this bank increases their interest rate for market ( for his customer) and when RBI decrease Repo Rate bank decrease interest rate for market.  Same with Bank Rate.

Example: Suppose Bank has 10% interest for his customers and RBI purchases financial instrument from bank and increased Repo Rate 2%, now bank have to purchase their financial instrument from RBI and have to pay 2% extra interest to RBI then bank increase rate of interest 12% (10% + 2%) for his customer to adjust this.

Reverse Repo Rate

Reverse repo rate is the rate of interest at which the central bank(RBI for India) borrows funds from other banks for a short duration. The banks deposit their short term excess funds with the central bank and earn interest on it. Reverse Repo Rate is used by the central bank to absorb liquidity from the economy. When it feels that there is too much money floating in the market, it increases the reverse repo rate, meaning that the central bank will pay a higher rate of interest to the banks for depositing money with it.

Helpful Sites:

http://en.wikipedia.org/wiki/Repurchase_agreement

http://www.knowledgehub.co.in/2010/03/meaning-of-repo-reverse-repo-crr-slr.html



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What is Inflation?

We listen at T.V channels and many more places about Inflation. But what is this?

Simple definition of Inflation is purchasing power of money. i.e how much quantity of product we purchase in certain money.

E.g: I can purchase 10 pieces of chocolate in Rs.100.00.

Now, increases of Inflation mean reduction of purchase power of money and vice versa.

Example: I can purchase 8 pcs of chocolate in Rs. 100.00 means inflation increased. If 11 pcs in Rs.100.00 means inflation decrease.

Other hand, Inflation denote to dearness level. Increase inflation increase dearness and vice versa

Calculation of Inflation:

To calculate Inflation, must know about CPI (Consumer Price Index) of starting year and end year.

Example:

CPI of 1980 was 101  = A     and

CPI of 1990 was 112  = B

Inflation = (B-A)/A x 100

               = (112-101)/101x100

               = 8.91 %

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