Answer to Question #294417 in Microeconomics for Shaaz

Question

“The growth rate of the economy is slowing down. Prices are going up rapidly. The government sticks to a money printing policy and policy of increasing its expenditure. Sri Lanka faces severe hardship in finding foreign exchange to repay debt and payment for important imports. Country’s agriculture seems facing a troublesome path. And So many issues in the economy”. Write an essay on Sri Lanka’s present economic crisis.

Answer 1

Money is very important and plays a great role in the economy by allowing trade to take place with ease. The government has special powers where by it can acquire more goods by printing more money a process known as Seigniorage.

However, Seigniorage is dangerous to the economy and may cause severe problems like in this case where Sri Lankan government has printed more money.

As government prints more money, people who sell their products, i.e goods, services and labour they increase their prices. This results to erosion of the purchasing power and value of the printed money.

Actually if the government prints too much, the money becomes worthless. This in turn results to hyper-inflation thus worsening the condition of the economy.