Question

Describe the process that makes the central bank decides the amount of money it prints?

Answer 1

Central Banks are responsible for maintaining the value (purchasing power) of currencies (i.e. money), which is to say, the trust of the citizens in their money. When people don't trust that their money will hold its value (i.e. the result of "too much" inflation, often referred to as hyperinflation), they will flee into other "hard" assets or currencies in order to maintain their purchasing power.In effect, everyone in an economy gets to vote on how much they trust their currency by their marginal propensity to hold it, or trade it away for something else. For sellers, it's a question of whether you accept a currency in trade for goods, or something else.

Ideally Money Supply should be equal to the total value of goods and services in the economy. It is very difficult to measure it accurately but yet it is important.So, Central Banks measure their economies as best they can, and attempt to approximate the required money supply. Since it is difficult to measure accurately, so inaccuracy leads to following:

• Inflation In this case excess money is printed and circulated in the economy. As a result the purchasing power of people increases and the aggregate demand also increases as compared to aggregate supply thus resulting in inflation.
• Deflation In this case less money is printed than required. As a result the prices of all goods & services decrease more or less proportionately, because there's less money than there are goods.

Out of the two inflation is more acceptable as compared to deflation because if the money in the pocket becomes more valuable over time (deflation), one has less propensity (Incentive) to spend it and thus resulting in slow growth and economic activity.