YASHWANTRAO CHAVAN MAHARASHTRA OPEN
UNIVERSITY, NASHIK
STUDENT NAME: MAHESH DATTA VISPUTE.
ROLL NO:
PRN NO:
STANDARD: MBA (FINANCE)
TITLE:
THE IMPACT OF THE MONEY SUPPLY ON
ECONOMIC GROWTH IN INDIA
1. Introduction:
Monetary policy of the most states focuses primarily on
holding steadily low inflation (inflation of costs), the arising of
which is often associated with an increase of money supply. The
viewpoint of management of the central banks, as well as
representatives of international financial organizations, that
policy permits to keep control for the financial markets, avoiding
significant fluctuations on them. The real (but unmentioned)
problem is that money is also a commodity, the turnover of which
has recently accelerated. Deficiency of money leads to an increase
the price of not only for money, but also for all other goods, for
which money is the equivalent. Thus, the compression of money
supply also leads to inflation, but now it is demand inflation.
Similar delusions are related with a fatal error of some
economic schools about the linear character of the links between
numerous economic indicators. Those views are firmly
entrenched in the ‘Economics’ textbooks and are reflected in
many scientific works of modern neoclassical synthesis. If we
look at the majority of the formulas given by them, we see nothing
more than a direct or feedback links of two or more variables. The
proof of such theories are often found in some empirical studies
conducted in different countries and times (Ihsan and Anjum,
2013); (Nouri and Samimi Ahmad, 2011) etc. The reason is,
dynamics of relations between the two indicators may indeed
appear linearly in certain short-run periods, just as any smooth
curve may be approximated by a straight line at each of its small
neighborhoods. However, monetary policy is known to have
long-term consequences, and shifts towards longer horizons
evoke the fact that connection between the same indicators
obviously loses its linearity (Goridko and Nizhegorodtsev, 2013).
An Increase in the supply of money typically of money typically
lowers interest rates, which in turn, generates more investment and
puts more money in the hands of consumers, thereby stimulating
spending. Business respond by ordering more raw materials and
increasing production.
If the money supply increases from position M21 to position
M22, the following occurs: 1) the money supply curve moves from
location MS1 to location MS2 along demand curve MD,
respectively, the interest rate decreases from r2 to r1; 2) reduction
in the interest rate causes movement of curve liquidity money
along.
The important of money supply in Indian ecomomy:
From the small choices of what you buy to the larger choices of
where you attend college, every decision you make will play a role
in supply and demand, and as such, the overall economy.
Economics is the study of resources and how to efficiently and
effectively manage them so that people have what they need to live.
The effect of money supply on inflation in India:
The rate of inflation in the economy is determined by the supply
of money. When the supply of money in the economy increases, so
does inflation, and vice versa.
Money supply increase in India:
The money supply can be increased in an economy by purchasing
government securities such as treasury bills and government bonds.
The reserves happens when the central bank tightens the money
supply, by selling securities on the open market, drawing liquid
funds out of the banking system.
Conclusions:
The study explains the prerequisites of a nonlinear relation
between money supply and GDP volume caused by rules of
market economy.
In countries where the level of monetization is quite low and
has not reached a critical level, such as the BRICS countries and
some rapidly growing countries in Asia, the increase of money
supply is necessary to stimulate economic growth. The
government fiscal policy should be expansionary, and monetary
policy should be aimed at eliminating the shortage of money as
long as there are unoccupied resources available to be engaged in
economic circulation in a short horizon.
Countries that have reached the saturation limit of a money
market, risk with a further increase in the level of the economy's
monetization will have the opposite effect and lead to the
deployment of cost- push inflation, in accordance with the
postulates of neoclassical synthesis.
We also consider the problems of monetary policy within the
European Union. The interests of the EU developed countries
which are the policy-makers of the European Bank, and the
interests of EU underdeveloped countries are facing there. Those
less developed countries are in monetary shortage, they suffocate
from lack of funds, and the European Bank does not intend to
provide the inflow. Debt problems in many of those countries are
externally enhanced, provoked by the policy of the European
Bank, aimed at pumping out of the resources of those countries
and turning them into the colonial markets for products of
companies from the Western Europe.
