Article Summary
Inflation is often described as a situation of ‘too much money chasing too few goods’ in terms of classical economists . This is the situation now in Venezuela. With the fall in the oil prices in the world market the country is going through an economic strain. To tackle the situation of hyperinflation the government is importing loads of banknotes . In recent times it has been observed that most of the governments print currency notes through professional private agencies that use better technologies that make the notes safe from being counterfeited, like watermarks and security strips.
A number of concerns arise from this government decision to order more bank notes to pump more money into the economy. First of all, pumping in more currency feeds into the inflations. It increases the inflationary pressure as there is more money in the economy. Secondly, with a high supply of domestic currency, the bolivar, the price of US dollar increases. It has increased to a stupendous level of 1000 bolivar a dollar . The weakening of the domestic currency is also a pressure on the state exchequer as the government has to import loads of necessities like medicines and mosquito repellants . Thirdly, the printing or purchasing of the bank notes is also a burden on the government funds. If the denominations can be increased the number of printable notes will come down to reduce the expenditure on bank notes. Fourthly, with high supply of currency along with a price control, black marketing is on the rise. The economy needs a supply side boost to increase domestic production rather than a higher supply of bank notes.
In the figure below we depict how the higher supply of currency notes has reduced the value of money in Venezuela. A large amount of money can buy too few goods. In the figure below the supply of bank notes has been depicted by a rightward shift in the money supply curve from S0 to S1. The demand remaining the same the high supply of currency reduces the value of currency from V0 to V1.
V0 S1
V1
D
Currency in circulation
Works Cited
Levacic, Rosalind and Alexander Rebbman. Macroeconomics: An introduction to Keynesian-neoclassical Controversies. Macmillan, 1982.
Vyas, Kejal. "Inflation-Wrought Venezuela Orders Bank Notes by the Planeload." The Wall Street Journal 3 February 2016: 7. English.
