Download Running Head: Money Supply Money Supply Student`s Name

Running Head: Money Supply
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Money Supply
Student’s Name
Institution
Running Head: Money Supply
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Money Supply
An economic theory (quantity theory of money) states a positive connection between the long
term price of goods and changes in the money supply. An increase in the amount of money
circulating in the economy can ultimately lead to an equivalent percentage increase in the prices
of commodities and services. Supply of money in an economy will always determine the level of
prices; hence fluctuations in money supply in a given economy result in proportional changes in
the prices of goods (a particular percentage adjustment in the money supply results in an equal
level of deflation or inflation of a certain economy. Normally, if the supply of money is reduced
banks will consequently have less money to lend to people and firms hence they will charge
higher rates. In order to acquire more money they will raise interest rates to attract savers to
deposit money in accounts. All this lead to lowering of aggregate demand and the prices will
therefore come down. On the other hand if supplies in increased interest rates are lowered to
encourage borrowing of money, this will boost the aggregate demand and economy output.
Increase in supply could lead to inflation if not well calculated.
Usually the total stock of money circulating in an economy is the money supply; this involves
the currency, printed notes, and money in deposit accounts and in form of liquid assets.
Valuation and scrutiny of the money supply help economists and policy makers to establish
policy of increasing or reducing money supply. This valuation affects the business cycle and
thereby affects economy. Over some periods measures of money supply have exhibited close
relationships with vital economic variables such as nominal gross domestic product and the price
level. It can be argued that money supply provides important information about the near term
course for the economy
Money is used in almost all economic dealings hence it has a powerful effect on economic
activity, as mentioned above increased money supply works both through lowering interest rates
which stimulates investment. More money is released to the consumers for expenditure. Firms on
the other hand respond to increased sales by ordering more raw materials and this boosts
production.as business activity spreads there is demand for labor and capital goods. In a shaky
economy stock market prices rise and firms issue equity and debt. If at all money supply
continues to increase, prices begin to rise mostly if output growth reaches capacity limits,
inflation results as lenders pursue higher interest rates to offset an expected deadline in buying
power over the life of the acquired loans. When money supply decreases opposite effects will
result leading to deflation.
The bible does not talk much about economic systems, it emphasizes on the foundation of
personal money management as being in Gods control. God is more interested in each individual
than in the failure or success in economic systems. The bible states the economic principle of
taxation, giving and investing.
Running Head: Money Supply
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References
Gowland, D. H. (2013). Controlling the money supply. Routledge.
Munzi, T., & Hlaváč, P. (2011). Inflation Targeting and Its Impact on the Nature of the Money
Supply and the Financial Imbalances. Politická ekonomie, 2011(4), 435-453.