Principle of Consumer Purchasing Power/Effects of Increased Currency Supply

Introduction 

There are many ways in which government controls its economy. One of the ways is to introduce more money with the intention of avoiding recession when the economy is already depressed. Once the economic stability is achieved, the supply stops to avoid inflation. Failure to this leads to hyperinflation like in the case of Zimbabwe and Germany. The government of the Island of Tapese introduces currency when the supply of corn is equal to its demand. People have enough to survive and thus a stable economy. In this context, the act of the government will definitely destroy the economy, leading to inflation. Consequently, consumer purchasing power will be greatly affected. This paper explains the principle of consumer purchasing power and effects of increased currency supply in relation to the people and economy of the island of Tapese. The production and consequently the supply of corn are equal to the demand of the island, thus stability of the economy. However, its government decides to introduce more dollars to the economy. The paper draws a hypothesis on the prices of corns in the current status of the economy. 

Effects of adding money to the economy 

The results of adding more currency to a given economy are sometimes suicidal and in rare cases advantageous. When a given economy prints money at a higher rate compared to that of its growth in GDP, when the growth factor is kept constant, hyperinflation occurs. The value of the currency will drastically reduce. However, printing money in a controlled environment may be done to avoid deflation which may otherwise lead to an economic recession. 

The oversupply of currency results to increase in the amount of money seeking to buy given produce. The quantity of the produce remains constant. So, the result is that the price of the product will go high to counter the increased money supply. In the case of Tapese Island, the prices of corn will go high once the government supplies more currency. 

Governments seek to understand the flow of money every day to determine how the economy is growing and to know the action to take. They know when to increase and when to decrease the supply of currencies in their countries. In addition, they seek to balance the increase and decrease of currency supply through financial forecasting. Forecasting is done 3 to 5 years before an economic recession or inflation actually occurs. When the required precautions are taken, I can avoid, however, it occurs in most cases. Economies take long to recover from inflation. That is why the effect of the 2008 economic recession is felt up to date. Some economies like Zimbabwe have never recovered, and her economy is still lame. 

Illustration 

In a normal situation, the island’s economy is stable when the supply of currency increases by 50% and the number of bags remains constant, the prices of the corn per bag increase leading to 50% inflation. Assuming that the supply of corns is directly proportional to the increased currency supply, the price per bag will not change, and consequently, no inflation will occur. People will still afford to purchase the corn. 

Examples of the Effects of Oversupply of Currency 

In 2008, Zimbabwe president authorized the printing of currency to pay the huge wages and depts. They wanted to solve the financial crisis that was facing the country at the time. The results were devastating. The daily inflation rate for their currency rose to 98%. The currency of the country was valueless compared to other currencies. 

After World War 1, Germany was destroyed. Companies started rebuilding, and the government needed to rebuild the infrastructure. There was high demand for cash to pay the workers. In response, there was uncontrolled printing of money which led to hyperinflation. 

The great depression occurred in 1929-1939. Banks became bankrupt; people lost their savings and economies collapsed. Great economies like the USA were greatly affected. This is because, at one point, the countries which were greatly affected by war were struggling to rebuild. They printed currencies and circulated them without regulations. Price per share dropped leading to the crash of the stock market; banks closed down, unemployment increased every day. When there is uncontrolled credit, such devastating results are inevitable. 

The Principle of Consumer Purchasing Power 

Consumer purchasing power is the ability of a consumer to purchase a given commodity. It is the value of the currency in relation to the number of goods or services that a unit price of a given currency can buy. That is why every business venture seeks first to understand the purchasing power of their target population. For example, imagine you are making 30 years’ ago salary today, and you want to live a better life. Would you manage? You will need a much higher salary to have the same quality of life. The value of the currency has changed, and so does the purchasing power. 

When there is an oversupply of currency in any given economy, there is inflation which lowers the ability of a consumer to purchase goods and services due to an increase in prices. For example, a laptop cost $500 3 years ago. Today, it costs $1,200. The high prices denote inflation of the economy and consequently my inability to purchase the laptop. High prices are controlled by the imposition of limits on wages, prices on the goods and services and salaries by the governments. 

Consumer purchasing power can sometimes be strong, where consumers can afford almost everything. This is when there is an oversupply of goods and services. Prices are therefore low and goods cheaper. 

Conclusion 

The consumer purchasing power of the people of Tapese Island decreases with an increase in currency supply. The prices of a bag of corn will increase since their currency’s value will decrease. This paper concludes that currency supply is directly proportional to consumer purchasing power of any given economy. To avoid extreme cases like the great depression and recessions experienced in Zimbabwe and Germany, strict financial policies are necessary to ensure that an economy recovers slowly. The government of Tapese Island should ensure that there is increased production of corn to increase its supply and in return increase the currency circulation. 

References 

Joshua G., Stephen K., Robin S. & Gregory N.M. (2011) Principles of Economic. Oxford, England: Oxford University Press. 

The Economist (July 17 2008). Zimbabwe; A Worthless Currency . Retrieved November 24, 2018 from https://www.economist.com/middle-east-and-africa/2008/07/17/a-worthless-currency?story_id=E1_TTSVTPQG