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24 April, 01:51

What changes will an economy face if the money supply increases?

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  1. 24 April, 05:20
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    An increase in the money supply will lead to in increase in the amount of money that people and firms will hold and they will spend more. Therefore aggregate demand will increase. The reverse will be true when money supply decreases. That is a decrease in the money supply will lead to a decrease in the amount of money that people and firms will hold and as a result they will spend less. This will cause aggregate demand to decrease.

    The demand for money can be in several ways.

    Transactions demand for money: the demand for money for exchange purposes is called transactions demand for money. If the transaction is very high then the quantity of money demanded for transaction is high too. Therefore, the transaction demand for money is seen as moneys role as a medium of exchange. It is also a store of value.

    There are two ways in which people can store their purchasing power

    in the form of money

    in the form of other financial assets such as private and government securities
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