Question

In 2016, a demonetization was introduced in India. 500 and 1000 rupee notes (equivalent to around 6 pounds and 12 pounds respectively) were banned within 4 hours of the policy. The reason for doing this was to flush out untaxed wealth being hoarded by the wealthy, help digitize the economy since India is one of the biggest cash-based economy and to starve terrorists and criminal gangs of cash. However, by doing this, there was a lot of damage done to the Indian economy and its people. The demonetization policy introduced had wiped 1% or more of the country's GDP around 1.5 million jobs minimum. Additionally, new notes were being printed as fast as they could. My question is, how does unexpectedly introducing a policy like this affect the economy's GDP and unemployment rate?

Answer 1

Ans-Unexpectedly Introducing an economic policy will affect the economy's GDP & unemployment rate in the following way's:-

1. Causes instability in the economy which rises economy dependence on other economy.

2. Due to increase in dependency because of less liquidity in the country will raise borrowings.

3. Increase in borrowings loose credibility of the economy.

4. High instability leads to less money supply in the economy

5. Less money holding means less inducement to invest which leads to high unemployment rate in the country.