Money has many functions but the pattern we are seeing through decades, underlying money, help us to concentrate on just one, for now, function money as a medium of exchange. To be more clear let us define what medium of exchange means; in our day to day life we exchange money for goods and services and in the international arena we also exchange money for goods and services but there we also exchange money for money, means we exchange dollar for rupee and sometimes rupee for dollar, given certain conditions.
For example, if we anticipate that dollar is going to depreciate we make up our mind to buy rupees because in the future we are going to profit ourselves from such a move. To be clearer, suppose that the present exchange ratio of dollar and rupee is 1:40 and we anticipate that dollar will depreciate. Actually, in economics appreciation is depreciation and depreciation is appreciation. For a common man, if we say him that dollar is going to depreciate he will understand that that ratio will come down but actually it increases. Therefore, he will think that the ratio will become either .75:40, but, no… actually depreciation will mean that the ratio will become 1.25:40. This is what depreciation means when we deal in foreign exchange… the latter one 1.25:40. And, the former is an example of appreciation.
Nevertheless, a man can only benefit himself from such a move if s/he spends the profit he gained in INDIA. Since, appreciation and depreciation are also a function of money supply. If money supply decreases in the US, which is controlled by its central bank, it means inflation has gone down and if money supply increases in the US it means inflation has gone up. Therefore, during increase in money supply it is always profitable to spend money at the home-country. The above explanation is just a simple version of the quantity theory of money. But that also depends on many factors.
However, money supply and actually the money in circulation also increase when people start spending their savings. But, since the government and central bank does not have any direct control over this supply of money it sometimes does not help from a policy point-of-view and may help through lower prices since the consumer has a incentives to spend now and if the economy is in uncertainty they may hold their savings some-more which sometimes result in liquidity-trap kind of situation.
But, money has more than one function and the next important function is its store-value. Central bank often keeps an amount of dollar as reserve and release rupees of equivalent value depending on the rate of exchange. This can also be helpful on a micro or local or state level. Means, the state can decide a value of a rupee too. Read this thing happening in the Western WORLD, many regions have their local currencies. Let us explain with an example.
Suppose our local currency is biscuit (of-course made of wheat) and a local bank controls its supply. The other way to control it is market. When market controls it, it produces trade cycles, and, inflation and deflation, as it normally happens, and the price of wheat will go up and down as in case of gold biscuits and currency prices. But, if local bank and government controls it simultaneously it will keep the real value of wheat-biscuit somewhat intact…
For example, if we anticipate that dollar is going to depreciate we make up our mind to buy rupees because in the future we are going to profit ourselves from such a move. To be clearer, suppose that the present exchange ratio of dollar and rupee is 1:40 and we anticipate that dollar will depreciate. Actually, in economics appreciation is depreciation and depreciation is appreciation. For a common man, if we say him that dollar is going to depreciate he will understand that that ratio will come down but actually it increases. Therefore, he will think that the ratio will become either .75:40, but, no… actually depreciation will mean that the ratio will become 1.25:40. This is what depreciation means when we deal in foreign exchange… the latter one 1.25:40. And, the former is an example of appreciation.
Nevertheless, a man can only benefit himself from such a move if s/he spends the profit he gained in INDIA. Since, appreciation and depreciation are also a function of money supply. If money supply decreases in the US, which is controlled by its central bank, it means inflation has gone down and if money supply increases in the US it means inflation has gone up. Therefore, during increase in money supply it is always profitable to spend money at the home-country. The above explanation is just a simple version of the quantity theory of money. But that also depends on many factors.
However, money supply and actually the money in circulation also increase when people start spending their savings. But, since the government and central bank does not have any direct control over this supply of money it sometimes does not help from a policy point-of-view and may help through lower prices since the consumer has a incentives to spend now and if the economy is in uncertainty they may hold their savings some-more which sometimes result in liquidity-trap kind of situation.
But, money has more than one function and the next important function is its store-value. Central bank often keeps an amount of dollar as reserve and release rupees of equivalent value depending on the rate of exchange. This can also be helpful on a micro or local or state level. Means, the state can decide a value of a rupee too. Read this thing happening in the Western WORLD, many regions have their local currencies. Let us explain with an example.
Suppose our local currency is biscuit (of-course made of wheat) and a local bank controls its supply. The other way to control it is market. When market controls it, it produces trade cycles, and, inflation and deflation, as it normally happens, and the price of wheat will go up and down as in case of gold biscuits and currency prices. But, if local bank and government controls it simultaneously it will keep the real value of wheat-biscuit somewhat intact…
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