Question

Explain how the money stock can be very important to the economy.

Explain why the money stock is perhaps not so important to the economy.

Answer 1

Stock of money or money supply in the economy is a very important determinant of economic health . The total value of monetary assets available in the economy in a specific time has a direct relationship to spending and economic growth . Empirical evidences always have proven that a strong connection lies between money stock growth and inflation . As the supply or stock of money increases the purchasing power of people increases so they start to demand more goods and services ; this shoots up the prices in the economy or causes inflation . Inflation affects real interest rates , investment , economic growth etc .

The important role of money stock and its effects can only be realized when the stock grows faster than production of goods and services . Supply of goods and services and wages play a more vital role sometimes . If the production capacity outweighs growth of monetary stock then the prices can be stabilized with just increasing growth and potential GDP . So here we find that resources and production capacity becomes more important than money stock .