Excess of Money Supply and Economic Growth

The money supply is an important factor in determining the level of economic growth in a country. The amount of money in circulation affects the prices of goods and services, the interest rate, and the overall level of economic activity. An excess of money supply can have negative effects on economic growth. Here are some reasons why:

Inflation

An excess of money supply can lead to inflation. When there is too much money in circulation, more money is available to purchase goods and services. This increased demand for goods and services can lead to an increase in prices. Inflation can hurt economic growth because it reduces purchasing power and makes it more difficult for businesses to plan and invest for the future.

Currency Devaluation

An excess of money supply can also lead to currency devaluation. When there is too much money in circulation, the value of the currency can decrease. This can make imports more expensive and exports less competitive. Currency devaluation can hurt economic growth by reducing international trade and investment.

Interest Rates

An excess of money supply can also lead to lower interest rates. When there is too much money in circulation, the demand for credit can decrease. This can lead to lower interest rates, which can make it more difficult for banks to lend money to businesses and individuals. Lower interest rates can also lead to asset bubbles and financial instability.

Conclusion

In conclusion, excess of money supply can hinder the process of economic growth. It can lead to inflation, currency devaluation, and lower interest rates. These factors can reduce purchasing power, hurt international trade and investment, and lead to financial instability. Therefore, it is important for policymakers to manage the money supply carefully to ensure economic growth and stability.

Excess of money supply will lead to an increase in general price level prevailing in the economy (or inflation) because the production of goods and services will remain the same. ... Hence, economic growth will be adversely affected by such inflationary pressures.