What You Need to Know About Money Supply Effects

National money supply is the amount of money available for consumer spending in the economy. In the United States, the movement of money is controlled by the Federal Reserve Bank. The increase in the money supply causes of falling interest rates and make more money available for customers to borrow from banks.


Federal Reserve increases the money supply by buying government securities, which actually puts more money in banks. The increase of paper money reduces the cost of US dollar, but it increases the money banks can lend to consumers. When banks have more to borrow money, they reduce the interest rates consumers pay for loans, which usually boosts consumer spending, because it is easier to borrow money. The Government will strive to increase the money supply, when the economy slowly starts to stimulate more consumer spending and confidence in the economy.

The increase in the money supply could have a negative impact on the economy. This leads to the fact that the dollar will be reduced by foreign goods more expensive and domestic goods cheaper. With complex global economy, it can spread and affect other countries. Steel, automobiles and construction materials can be more expensive. As a result, the construction price of the house and a real increase in property due to increased material and construction costs. This makes it easier for customers to get loans, because banks are reluctant to lend money.

Money Stacks

Successful management of the world economy requires effective monetary policy. The increase in the money supply is only one of many options available to policy makers of the government. They can also change tax rates, trade restrictions adapt, modify requirements, bank reserves and the change in the federal rate.

If the increase in the money supply is too strong, it can lead to deflation in the economy, as the value of the currency of the country could be reduced in comparison with other countries. This leads to the fact that the products home nation to become a cheap and attractive for foreign investment.

Originally posted 2016-05-23 14:40:21.


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