Money supply can rise if Government sells bonds or bills to the non-banking sector. If the public buys anything from the government they will reduce their deposits in banks; there will be no expansion in the money supply.
How does an increase in money supply affect output?
An increase in the money supply means that more money is available for borrowing in the economy. In the short run, higher rates of consumption and lending and borrowing can be correlated with an increase in the total output of an economy and spending and, presumably, a country’s GDP.
What causes a decrease in the money supply?
Causes of this shift include reduced government spending, stock market failure, consumer desire to increase savings, and tightening monetary policies (higher interest rates). Falling prices can also happen naturally when the output of the economy grows faster than the supply of circulating money and credit.
What does it mean when the money supply is expanded?
In most growing economies the money supply is expanded regularly to keep up with the expansion of gross domestic product (GDP). In this dynamic context, expansionary monetary policy can mean an increase in the rate of growth of the money supply, rather than a mere increase in money.
What happens when the money supply is too high?
This means that money supply exceeds money demand, and the actual interest rate is higher than the equilibrium rate. Adjustment to the lower interest rate will follow the “interest rate too high” equilibrium story.
What happens in the short run when the money supply increases?
The short run is the time before the money supply can affect the price level in the economy. In Chapter 18 “Interest Rate Determination”, Section 18.14 “Money Supply and Long-Run Prices”, we consider the long-run effects of a money supply increase.
How does the government increase the money supply?
This can be accomplished with open market purchases of government bonds, with a decrease in the reserve requirement, or with an announced decrease in the discount rate. In most growing economies the money supply is expanded regularly to keep up with the expansion of gross domestic product (GDP).
