Explain the concept of demonetisation. - Vidyadip

Question

Explain the concept of demonetisation.

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Answer

A currency note of ₹ 2,000 is just a piece of paper unless the government declares it as a legal tender. It carries the exchange value of ₹ 2,000 because the government imparts this value to it. When the government withdraws the value imparted to a currency note, it no longer remains a legal lender. It is reduced to a piece of paper. Withdrawal of the status of ‘legal tender’ to the currency in circulation is called demonetisation. After demonetisation, the exchange value imparted to the currency ceases to exist. Demonetised currency is no longer accepted as a medium of exchange. Its purchasing power is reduced to zero. Thus, demonetisation of ₹ 1,000 and ₹ 500 notes on Nov. 8, 2016 by the Government of India implied that these notes lost their status of legal tender. These notes were no longer to be accepted as a medium of exchange. Their purchasing power was reduced to zero. These notes were reduced to pieces of paper.

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