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Sunday, March 15, 2009

Counterfeit Money

Some of the ill-effects that counterfeit money has on society are:

1. Reduction in the value of real money
2. Increase in prices (inflation) due to more money getting circulated in the economy - an unauthorized artificial increase in the money supply
3. Decrease in the acceptability (satisfactoriness) of money - payees may demand electronic transfers of real money or payment in another currency
(or even payment in a precious metal such as gold)
4. Companies are not reimbursed for counterfeits. This forces them to increase prices of commodities

At the same time, in countries where paper money is a small fraction of the total money in circulation, the macroeconomic effects of counterfeiting of currency may not be significant.
The microeconomic effects, such as confidence in currency, however, may be large.

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