What is the mechanism to print currency in the country? How much currency can a country print at a time?

Answer :-

Case 1:-

This question has always troubled many.
Let me explain in a very simple way.

First things first. It is the Reserve Bank of India, the country's central bank, that decides how much notes have to be printed, often in concurrence with the Government of India. This decision is a part of RBI's monetary policy - the policy that determines the amount of money in the economy.

Now, the very pertinent question - since the country is free to print any number of notes it wants, why doesn't it produce billions of rupees and distribute it among people and end all the poverty in one go?

Let us assume there are only 3 people in a country: Ameerchand, Moolchand and Fakeerchand, having a wealth of Rs. 300, 200 and 100 respectively. Also, there is just one commodity in the country that all three of them would buy using up all their wealth.
Therefore, total wealth in the country = Rs. 600 (300+200+100)
Total commodity in the country: 60 kgs of rice.
Since they use their entire wealth to buy this commodity only, the price of rice would be = Rs. 10 per kg (600/60).
At this rate, Ameerchand can buy 30kg of rice, Moolchand buys 20kg and Fakeerchand buys 10kg of rice.

One day they get hold of a currency-printing machine. They decided to double their money by simply printing more notes.
Now they have Rs. 600, 400 and 200 respectively.
Total wealth now = Rs. 1200
But total commodity in the country is still 60kgs of rice.
The new price of rice = 1200/60 = Rs. 20 per kg
They go to buy the rice. With 600 bucks, Ameerchand would still be able to buy the same 30kgs only, Moolchand 20kg and Fakeerchand 10kg! Damn! They realised how futile it was to print those notes.
Merely printing of notes doesn't do good to anyone. If the total money supply is increased disproportionately to the increase of goods (and services) in the country, it only leads to devaluation of the currency. Although their wealth doubled, the value of their currency got halved.
Therefore, to really become rich, they need to increase production of goods (and services as well), in addition to the money supply. Had the supply of rice also doubled along with the doubling of their money, the price of rice would have remain unchanged. With their new increased wealth they would have been able to buy double the amount of rice than they could before. That's what would have made them "wealthier" in the real sense.

You may extend the same concept to the entire country. If the RBI prints billions of rupees and doubles everyone's wealth, the cost of everything in the country would double. 

This can also be understood from the simple law of demand and supply. If everybody has got more money out of nowhere, the demand of every goods and service would also increase almost commensurately (since everybody becomes rich, everybody now wants to own a Mercedes, fly in a business class, buy more fruits and chocolates). This would lead to an increase in the price of all the goods and services in the country (inflation).

Therefore to become rich, the country (its people) has to increase its production. That's the reason why countries are crazy about GDP (a measure of production).

 Case 2:-

Let's suppose you have 100 kgs of gold and there are 10 people in your family. You now decide to distribute the gold between all the family members. However, instead of giving everyone 10 kg of physical gold, you give everyone a coupon that one could get 10 kg of gold in exchange for.

So 1 coupon = 10 kg of gold; 10 coupons = 10 x 10 kgs of gold. = 100 kgs of gold.

Now, each of those 10 members marry and bring a spouse into the family. Now, there are 20 members. However, the gold is still 100 kgs. In order to divide the gold equally among all members, you print 10 more coupons and hand them over to the new members of the family, while informing everyone that a coupon now can only be exchanged for 5 kgs of gold.

Therefore, after spouses come in: 1 coupon = 5 kg of gold; 20 coupons = 20 x 5 kgs of gold = 100 kgs of gold.

It should be obvious now that printing more coupons does not increase the value of the individual coupons because the 'wealth' of the family has not increased: it is still worth only 100 kgs of gold.

However, if by some great fortune, you were to now acquire additional 100 kgs of gold, each coupon now automatically becomes worth 10 kgs of gold.

1 coupon = 10 kgs of gold; 20 coupons = 20 x 10 kgs of gold = 200 kgs of gold.

A country too functions in much the same way where the currency note functions as a coupon that has an inherent value. Printing more currency notes (coupons) will only reduce their inherent value in direct proportion to the number of additional currency notes printed.

The value of currency notes increases only when the 'wealth' of the country increases. This wealth is typically measured in GDP, GNP etc. The more wealth a country creates and accumulates, the more valuable its currency notes become. Merely printing more currency notes will not make a country wealthy.

EDIT: As far as the question of 'how much money can a country print', the answer is 'as much as it wants', if it has the resources to print them. The inherent value of each currency note will diminish accordingly (i.e., one rupee/dollar will be worth less than before), and consequently, more currency notes will be required to purchase the same goods (say, 1 kg of gold). This is also known as 'inflation'.

source :- quora.com