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2.Impact on Money Supply The money supply will shrink in the short run. However, as the new notes get circulated in the market and become readily available, the money supply will rise. It may or may not rise to its previous level and depends on the action of RBI and the government.3.Impact on Market The overall demand will be affected, particular of:Consumer goodsReal EstateGold and luxury goodsAutomobiles (only to a certain limit)As a huge share of transactions in these categories was done either through cash or usage of dubious channels, these sectors are expected to face certain moderation in demand from the consumer side.4.Impact on Prices As price is highly demand driven, the fall in demand will reduce price level. Consider falling prices in the following categories:Consumer goods- Marginal reduction in prices has been due to moderation in demand asplastic money (cards and other forms) cannot compensate for all the transactions. Real Estate- Prices are widely expected to fall. However, in the medium term, the pricescould again rise as infrastructure developers re-account their prices.Section 2 Group #13
IIM SHILLONG5.Impact on GDP The drop in the consumption demand will affect GDP, though not much significantly as most of the demand will be deferred until cash situation becomes normal. According to the Motilal Oswal report, the currency which will not flow back into the financial system will reduce broad money supply from system. Broad money refers to money which in circulation in the system, demand deposits, repos which are not maturing near term. Short term impact is a lack of money circulation in the economy and increased bank deposits. Here is an analysis of how currency supply will affect if money in the system does not return.Now as per Milton’s theory of money supply of money in system multiplied by the velocity of money will be equal to price level multiplied by GDP Growth in real terms which nothing but Nominal GDP growth rate.So if the money supply is effected it will be reflected in Real and nominal GDP Growth rates. Section 2 Group #13
IIM SHILLONGSection 2 Group #13
IIM SHILLONG6.Impact on Intrinsic Value of rupeePost demonetization rupee falls sharply in comparison to the dollar as envisaged by many expertsas an impact of demonetization. Given the fact demonetization will adversely impact supply of money in the economy as per general demand supply rule rupee will be short in supply and valueof money should rise in the long term. We believe that real purchasing power/intrinsic value of rupee is very high and strong in comparison to currencies of other economies. To demonstrate that we analyzed the movement of rupee against 2 major currencies (USD & Euro ) post demonetization.
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Economics, gross domestic product, demonetization, black money