Economy, asked by seemachib17261, 1 year ago

Can demonitisation corrupt the situation of inflation

Answers

Answered by Tusharmoharana

Demonitisation will have a negative effect on inflation (meaning inflation will go down or leading to deflation). This means lowered prices and cheaper goods. Seems good enough? Here is what may happen if the deflation is not taken care of:

Goods and services will get cheaper meaning lower profits for the companies/production units.

Lower profits for the companies mean down sizing in the organisation (laying off people to maintain profitability) leading to unemployment.

Higher unemployment would lead to lower disposable incomes (what people spend apart from spending on basic necessities) leading lower demands of goods.

Lower demands would create a demand supply disparity. Meaning, supply would be greater than the demand leading to further lowering of prices( so that people buy more and profit is generated through volume sales)

What happens next? start from step 1 again. This would ultimately lead lower disposable incomes and higher unemployment rates which can lead to recession (as pointed in one of the above answers).

What steps should be taken by the government to curb the situation?Borrow additional money from the RBI and increase government spending on infrastructure, healthcare, education which would not only employ more people but also break the downward spiral of deflation.

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OTHER ANSWERS

Yogesh Chauhan

Yogesh Chauhan, Research Scholar, observer, learner, chemistry lover

Answered Nov 13, 2016

Definitely, there will be positive effect of demonetization on inflation. Inflation will go down. It will cause deflection in the market as people who have black money will be afraid to declare it or will not declare it at all (may be try to destroy it). This will lead to decrease in the circulation of money in the market hence value of money will increase as quantity of commodities available in the market will not go down. Every body will deposit there money in the bank hence bank can give this money as a loan which will lead to decrease in loan interest. Property rates, corruption, crime, terrorism etc will decrease as there will be no black or fake currency to fund these.

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Mathew Cherian

Mathew Cherian, Indian citizen lived and watched American laborers.

Answered Dec 7, 2016 · Author has 5k answers and 2.4m answer views

Theoretically inflation should come down due to demonetization, because consumers will spend less based on scarcity of currency notes for the same. So market will adjust to the new supply/demand situation, to reduce market clearance risk, which can lead to stock build up and cash flow problems, by reducing price at which clearance happen. So there can be some deflation, and later on it might stabilize, but if black money completely stops and black market end, then optimal consumption emerge, leading to rational prices to prevail.

I think PM Modi, has clear perception to what he is doing and hopefully a stronger India might appear in future, based on related regulations that are asssumed to appear

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