Why makes the currency to fluctuate and what will happen if we print excess currency.

Why makes the currency to fluctuate and what will happen if we print excess currency?

Currency fluctuation.

You all must have seen that some currencies rise whereas some fall in value i.e they depreciate. Ever thought why this happens and what makes these currencies fluctuate?

Currencies fluctuate because of the demand and supply of money. The amount of money circulating in the county is mostly governed by the counties import and export values.

When the export goes up in at a higher rate than import, it means more revenue is earned in foreign currencies, indicating reduce in the supply of Indian currencies (domestic currency) in the foreign market which means money is kept in the country for circulation and we see an appreciation in the exchange rate of the currency. 

Alternatively, if the imports are more than the exports, it means the supply of domestic currency increases in the foreign market, resulting in its depreciation.

Now, you will be thinking, if this is the situation then why not the government prints extra currency.

Why?

If the government prints extra currency than this will lead to currency devaluation. The National wealth of any county is fixed and can only increase with an increase in the economy.

Suppose, the government starts printing currency and distribute it among the people, this will increase the flow of money into the country. But the economy or wealth remains the same. Hence, as per demand and supply, an increase in the supply of the currency depreciates its value.

Let's imagine, if there is a sudden increase in the supply of money in the system, then the demand for all goods and supply will increase. Hence, this will ensure you to buy the same thing with an increased price leading to inflation.

Let's take one real example. Have you ever heard of the currency crisis of Zimbabwe?

The Zimbabwean president, Mr Mugabe had the intention to remove all poverty from the country. So, he took big pieces of land from whites and redistributed it equally to ethnic Zimbabweans. This led to the collapse of the banking and agricultural industry which in turn caused unemployment in the country. This, the country started printing more and more currency and distributed it among its people. But the currency lost its value, leading to hyperinflation. The inflation rose from 19% to 48% in just one year (If you compare it to the current inflation in India, it's 3.34% per year and in the US it's 0.62% per year). The prices rose so much that with $15 US currency you could just bye three eggs.

In the next few years, the inflation rose so much that the government of Zimbabwe had to print Z$100 trillion dollar notes which valued 40 US cents.

One Hundred Trillion Dollars

Finally, the government had to import a foreign currency to bring back the prices to normal. But it took a long time to overcome this financial crisis.

And this was the biggest lesson whoever had thought of eliminating poverty from the country by printing money.

~By Suddha.