Demonetization

Home

Financial Terms and Glossary

Demonetization

Demonetization is the process by which a government withdraws the legal tender status of a particular currency unit.

Example

In 2016, India demonetized its 500 and 1,000-rupee banknotes to combat black money, forcing people to deposit or exchange these notes.

Key points

• Withdraws legal tender status of a currency.

• Aims to reduce counterfeiting, corruption, and tax evasion.

• Can cause short-term economic disruption but supports long-term reforms.

Quick Answers to Curious Questions

Why do governments implement demonetization?

Governments use demonetization to fight corruption, counterfeiting, and promote transparency by forcing individuals to deposit untaxed or black money.

What are the risks of demonetization?

It can cause significant short-term economic disruption, especially for small businesses and individuals reliant on cash transactions.

How does demonetization affect the economy?

In the short term, demonetization can disrupt business and consumer activities, but it may support broader economic reforms by increasing financial transparency.