Thread by @caswapnilkabra

‘Why don’t central banks like RBI mint more money and pump in the economy to speed up the growth and solve nation’s basic problems?’
As a teacher, I have been asked this many times.
Here’s a simple thread to explain the basic economics behind why this is not so ideal. 🧵👇 (1/n)

RBI is not against the increasing demand and the growth. All RBI wants is 𝑠𝑢𝑠𝑡𝑎𝑖𝑛𝑒𝑑 𝑎𝑛𝑑 𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑙𝑒𝑑 growth.
Let us understand how things work from the very beginning, shall we? (2/n)

𝐑𝐁𝐈 𝐦𝐢𝐧𝐭𝐬 𝐦𝐨𝐫𝐞 𝐦𝐨𝐧𝐞𝐲
So, RBI decides to mint more money and increase the money supply in the economy. (3/n)

Whenever, RBI mints more money these will be followed:
👉RBI will lend more money to the Banks.
👉 Banks will now lend more money to the producers and businesses.
Thus, now the businesses will have more money in the hands for production of goods and rendering of services. (4/n)

𝐈𝐧𝐜𝐫𝐞𝐚𝐬𝐞𝐝 𝐩𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐨𝐟 𝐠𝐨𝐨𝐝𝐬 𝐚𝐧𝐝 𝐬𝐞𝐫𝐯𝐢𝐜𝐞𝐬
With more money in hands, businesses will raise their productions. Thus, it will be followed by these things: (5/n)

👉More production of goods and services would mean more spending of money on resources to buy for production.
👉The demand for labor will rise. Thus it would result in increase in employment rate.
👉The economy will soon flourish and the growth would be leaps and bounds. (6/n)

𝐀𝐟𝐭𝐞𝐫 𝐞𝐟𝐟𝐞𝐜𝐭𝐬 𝐨𝐟 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞 𝐢𝐧 𝐢𝐧𝐜𝐨𝐦𝐞 𝐚𝐧𝐝 𝐞𝐦𝐩𝐥𝐨𝐲𝐦𝐞𝐧𝐭
More employment would mean that households (people who worked for businesses) would be happier than ever. They will have more money in their hands. It will be followed by: (7/n)

👉More money in the hands of the people would mean more purchasing power.
👉Thus, the demand for the goods and the services will increase. (8/n)

𝐏𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐫𝐞𝐚𝐜𝐡𝐞𝐬 𝐨𝐩𝐭𝐢𝐦𝐮𝐦 𝐥𝐞𝐯𝐞𝐥
Now, looking at the high demand, the businesses will increase their supply till the level where it reaches the optimum capacity of their factories. This will have the following consequences: (9/n)

👉Employment will reach maximum level considering how the businesses are tempted to increase their production levels looking at the demand.
👉Supply will go up no further as there will be constraints like factory size, lack of availability of raw material, etc. (10/n)

𝐒𝐮𝐩𝐩𝐥𝐲-𝐃𝐞𝐦𝐚𝐧𝐝 𝐦𝐢𝐬𝐦𝐚𝐭𝐜𝐡
Now, we have more demand as there is maximum employment level in the economy and less supply as factories have already reached their optimum level. Hence, Demand>Supply.
This will result into the following: (11/n)

👉The price of goods and services will increase causing inflation as there are too many people but too less good and services.
👉With the price rise, people can not afford costlier goods and services.
👉So, there will be fall in the demand of goods and services. (12/n)

𝐏𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐒𝐭𝐨𝐩𝐬!
The producers and the businessmen will soon realize that the demand for the goods and the services is falling. Thus they will now be worried that there are no buyers for their products.
This will have the following impact: (13/n)

👉They will start cutting down the production. Some may even stop it temporarily as they have already lot of stock to sell.
👉Cutting down of production would mean lesser manpower requirement. Hence, there will be few people out of job. (14/n)

𝐔𝐧𝐞𝐦𝐩𝐥𝐨𝐲𝐦𝐞𝐧𝐭 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞𝐬
With the declining production, there will be more unemployment.
This will have huge consequences such as: (15/n)

👉Decline in demand as out of the job people have no money for spending.
👉Businesses will further cut down the production. More to worry, there will be slump and recession like phase in the economy. (16/n)

👉Unemployed people may resort to illegal activities like theft.
👉The economy will be in a mess in a short span of time! (17/n)

So, I hope I painted the picture well.
The mess began when RBI focused on 𝘶𝘯𝘤𝘰𝘯𝘵𝘳𝘰𝘭𝘭𝘦𝘥 𝘨𝘳𝘰𝘸𝘵𝘩 and not on the 𝘱𝘳𝘪𝘤𝘦𝘴. (18/n)

For any economy to have 𝘴𝘶𝘴𝘵𝘢𝘪𝘯𝘦𝘥 (slow and steady) growth RBI plays an important role. Remember that it is better to be a tortoise than a rabbit. (19/n)

For RBI, Inflation will always be a priority because high prices can mess up the economy.
The economies of Zimbabwe and Germany are perfect examples of the havoc which could happen if the country’s central bank fails to control the money supply. (20/n)

Usually people carry money in pocket and goods in the basket, but the case with Zimbabwe was that people were carrying money in the basket and goods in the pocket! (21/n)

To sum up,
👉RBI wants ‘sustainable’ growth over ‘uncontrolled’ growth.
👉RBI wants GDP to grow but it wants that to be done keeping a check on the general price level too. (22/n)

In case you liked what you read, you may also connect to me on YouTube.
youtube.com/channel/UCxuo5…

This was originally written by me here,
quora.com/Why-is-RBI-so-…

Tagging @datta_arvind, @dmuthuk for better reach 🙏