MONEY AND BANKING (Part – I)

All banknotes issued by the RBI are backed by assets such as gold coin, gold bullion, rupee coin, Govt. of India rupee securities and foreign securities, as defined in Section 33 of RBI Act, 1934

The Government of India (Ministry of Finance) is the issuing authority of coins and supplies coins to the Reserve Bank on demand. The Reserve Bank puts the coins into circulation on behalf of the Central Government.

Coins are minted by the Government of India. The Reserve Bank is the agent of the Government for distribution, issue and handling of coins. Four mints are in operation: Mumbai in Maharashtra, Noida in Uttar Pradesh, Kolkata (W. Bengal), and Hyderabad (Telangana).

The Government of India (Ministry of Finance) is the issuing authority of coins and supplies coins to the Reserve Bank on demand. The Reserve Bank puts the coins into circulation on behalf of the Central Government.

Coins are minted by the Government of India. The Reserve Bank is the agent of the Government for distribution, issue and handling of coins. Four mints are in operation: Mumbai in Maharashtra, Noida in Uttar Pradesh, Kolkata (W. Bengal), and Hyderabad (Telangana).

Currency expansion means supply of money has increased Due to increase in money suppl, the value of money decrease. As a result, prices of goods and service will rise.

Demand-pull inflation emerges when the aggregate demands exceed the level of aggregate supply or full employment output. Consumers and investors seek to buy more than the total amount of output that can be produced. The demand-pull inflation may be caused by an increase in money supply. This would also occur when aggregate demand increase either because of rise in the marginal efficiency of Capital or a rise in the propensity to consume. Expansionary fiscal policy is intended to increase the money supply in the economy using budgetary instruments to either raise spending or cut taxes. So, expansionary fiscal policy can cause demand-pull inflation. Hence, statement 1 is correct. A fiscal stimulus is a package comprising tax rebates and incentives. It is used by the government to stimulate the economy and prevent the country from a financial crisis. It increases money supply in the economy and is intended to increase the demand, job creation, etc. So, it can also lead to the demand-pull inflation. Hence, statement 2 is also correct.

Inflation-indexing wages do not lead to demand-pull inflation because they are adjusted with inflation. They are provided to reduce the effect of inflation. Hence, statement 3 is incorrect.

Higher purchasing power can lead to demand-pull inflation, because consumers have a lot to spend and they can demand more goods/services. Hence, statement 4 is correct. Rising of interest rates reduces money supply in the economy, so, it cannot lead to demand-pull inflation. Hence, statement 5 is incorrect.

Inflation refers to the rise in the prices of goods and services and decline of purchasing power of a given currency over time. In comparison to foreign currencies, the value of Indian rupee also decline due to inflation. Hence, it does not improve the exchange rate.

A falling rate of inflation rate means that prices are increasing more slowly than before. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index (e.g. consumer price index). If inflation rate is 5% in any month of the last year and it is 4% in same month this year, that means prices are increasing in both years in comparison to their previous years, but prices are increasing more slowly this year than the last year.
Deflation, or negative inflation on the otherhand, happens when prices generally fall in a economy in comparison to the prices of same period of the previous year. Increased food supply affects prices, but it is not a definite implication of a fall in inflation rate.

Due to inflation, the prices of goods and services increase and the purchasing power of currency decline over time. In this situation, debtors get advantage and creditors get disadvantage.

Affected Groups Impact of Inflation

Debtors, Producer, Traders, Farmers, - Benefit
Changeable Income groups etc.

Consumers, Creditors, Moneylenders, - Loss
Pensioners, Fixed Income groups,
Savings Account holders etc.

Public expenditure, Import, - Increase
Employment, Taxes

Public savings, Export - Decrease

Inflation occurs when there is a general increase in the price of goods and service and a fall in purchasing value of money . Inflation allows debtors (borrowers) to pay creditors (lender) back with money worth less than when it was originally borrowed, which benefits debtors. Thus inflation brings about a redistribution of real wealth in favour of debtors at the cost of creditors. Investors in bonds and securities with fixed interest rates, consumers, fixed income groups pensioners etc. also lose in real terms during inflation.

Inflation occurs when there is a general increase in the price of goods and service and a fall in purchasing value of money . Inflation allows debtors (borrowers) to pay creditors (lender) back with money worth less than when it was originally borrowed, which benefits debtors. Thus inflation brings about a redistribution of real wealth in favour of debtors at the cost of creditors. Investors in bonds and securities with fixed interest rates, consumers, fixed income groups pensioners etc. also lose in real terms during inflation.