No Reserve in printing money

........ In the jargon, we will say that the supply curve of the entire economy — or at least a number of key goods and services — is shifting upwards to the left. How should the aggregate demand curve of the economy react in this environment? Should it move further to the right – which will exacerbate the price level situation in the economy -- or should it move to the left or at least remain where it was? Confronting and answering these questions is the very essence of macro-economic policy formulation and management – at least of one key institution viz, the Reserve Bank of India. Indeed, it should be understood that the RBI can impact only the aggregate demand curve in the economy, for supply is dependent on so many factors beyond its control – for instance, climatic conditions in agriculture, the skill level of the labour force or indeed, the subterranean conditions related to gas exploration and production. (Given that, one wonders why “real sector” players make so much fuss about low, lower and lowest interest rates. They should just ask the RBI to produce a broadly stable and predictable demand environment signified by reasonably stable price levels – and set whatever interest rates are necessary just to achieve that. That can be the RBI’s most important contribution to real output growth)............

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