Increasing the money supply stimulates the economy and encourages higher growth rates, True or False ?
Answer:
Yes increasing the money supply will stimulate the economy. Given a constant demand (for money), interest rates will fall with the injection of money. Lower interest rates will encourge more borrowing and spending of money. That is the quantity of money demanded will increase. Usually cause the price level to go up.
This can be seen through Monetarism, which is one philosphy of money. The Equation of Exchange: MV = PY
Money supply x Avg. velocity of money = Price level x Quantity of goods & services produced. PY = GDP. Here Y and V are generally considerd fixed.
There is a direct causal relationship between the money supply and economic activity.
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if by increasing the money supply you mean having the government print more, then the answer is no. printing more money devalues it. germany did that back in the early part of last century, and inflation skyrocketed. money was so worthless it was worth more as kindling than a method of payment. i have seen pictures in an economics book of germans taking a wheelbarrow load of paper money to buy bread.
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