Question

In response to worries about counterfeiting, residents of Upper Shawarma (U.S.), the large country that borders the country of Babaganoush, are temporarily choosing to hold more of their wealth in the form of interest-bearing bonds instead of money.

a) Using the DD/AA model, explain how this would affect the BB/US$ exchange rate & output in Babaganoush.

b) In Babaganoush, exporters of tree sloth pelts are politically powerful.

What type of policy action are they likely to demand from their leaders in order to mitigate the effects of what is happening in Upper Sharwarma?

Answer 1

Answer)

Demonetization policy has all the noble intentions, but without proper implementation plan. It was first told that it is used to wipe put the black money. Though, more than 90% of money in circulation is back to the RBI. So, no any big size of black money is unearthed. The second objective was to stop the terror funding. The policy achieved it up to a certain level, but flow of money cannot be stopped for longer period as duplicate notes can be printed once again and other foreign currencies are being injected for terror funding.

The third objective was to flush the duplicate currencies out of the system. The government also succeeded up to a certain level, but cases of new fake or toy notes being delivered from some of the ATMs are reported. These objectives are achieved at the cost of:

1. Expenses in issuing and circulation of new currencies

2. People dying while being in the queue for more than 4 hours outside banks

3. Destroying may SMES and cottage industries who operate on cash on a daily basis.

4. People spending many hours in the queue, rather doing some productive work

Any success of the policy is judged on the basis of long and short term benefits as well as the cost associated with the policy. For till now, it does not seem that the policy has truly achieved its objectives as people with big cash (black money) don’t use Indian currency for hoarding. It is the small middle class people who keep cash at home and now they have to answer the questions for their own hard earned money.