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I have learned that in a country currency is printed equal to production of goods and services in a year.

I want to know if in a year a country produces rice of 10000 rs. The government will print currency of up to rs 10000. In the next year the country again produce rice of 10000 rs. Will the government again print 10000 rs. more? If yes will it not lead to excess currency in circulation?

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The amount of currency in circulation does not equal the annual production of goods and services in a country. It is usually much smaller.

For example, as of July 2013, currency in circulation—that is, U.S. coins and paper currency in the hands of the public—totaled about $1.2 trillion dollars.

In contrast the U.S. GDP for the same year was about $17 trillion dollars.

You can find more information on how Fed prints currency to meet demand from this Fed article.

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The objective of printing money is to respond to inflation, not to keep up with changes in GDP. If the inflation rate is high and the stock of money in the economy remains constant, the real amount of money will decrease as the value of money will decrease. ("Real" has a specific definition in economics that you should try to learn. It refers to the inherent value a good has, regardless of the nominal number of rupees that someone says the good is worth.) In studying economics, you will become aware that real fluctuations often matter much more than nominal fluctuations of economic variables. By that I mean that the inherent value of goods and services (what is actually produced) matters more than numbers that try to describe their value. Unfortunately, because of inflation, the numbers that we come up with about something like the stock of money do not give as much useful information compared to the real stock of money.

So, we are concerned about the real stock of money, and inflation erodes that, which is why more money must be printed in order for the real stock of money to be kept constant.

I have a personal aversion towards talking freely about "printing" money, because I think it obfuscates the much more nuanced and complicated process of money supply than simply asking a machine to print some notes. "Printing" money actually refers to money supply. The main component of that process is that the central bank buys bonds and other securities, thereby increasing the amount of liquidity in the financial market, and driving down interest rates. As interest rates go down, consumers and businesses have less incentive to save, so their consumption and expenditure will increase, along with an increase in demand for more liquid forms of money, one of which is physical currency.

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  • $\begingroup$ How would you have high inflation and constant money supply? $\endgroup$ – zeta-band May 21 '18 at 21:05
  • $\begingroup$ High inflation will decrease the real stock of money, so more money will need to be supplied in order to keep the real money supply constant. $\endgroup$ – ahorn May 22 '18 at 6:35
  • $\begingroup$ I think you are unclear on what the word inflation means. To have generally increasing prices on a roughly fixed supply of goods and services the money supply has to increase. $\endgroup$ – zeta-band May 22 '18 at 18:16
  • $\begingroup$ Money supply is controlled by the central bank. It does not rise automatically with inflation. $\endgroup$ – ahorn May 22 '18 at 18:33

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