Question

How does the use of money improve an economy and allow for a greater division of labor?

What should this greater division provide?

Are there any negative effects of increasing the money supply?

Are there any positive effects of decreasing the money supply?

Answer 1

1. Money can be used for both consumption and lending. As both increase, the output also increases, it leads to the circulation of money in the economy which helps in increasing the GDP of the country.

The distribution of work into different tasks among different specialised people is called division of labour. It means the people who are specialised in a particular field are assigned that particular work.

The money can be used for getting the work done from specialised people having different skills and qualifications in different areas , money acts as the biggest motivation for labour which was not the case in barter system. Through money we can hire specialised labour force as money is the medium of exchange and this leads to diversification of output.

2. Division of labour leads to higher and quality output as the output is produced by the workers having specialised skills and qualification. This also promotes large scale production ie. economies of scale. So, the size of the market also increases. This eventually increases the competition in the market and the firms are forced to lower their prices, the training costs also goes down because the workers are well qualified in their work.

As the employment increases ,It leads to the development of infrastructure, standard of living and ultimately enhances the gdp of the country.

3.Increasing in the money supply leads to the increase in the demand rapidly.Due to excess demand prices in the economy goes up. Which in turn  leads to the increase in the interest rates and that discourages the loans and investments. The private consumption also decreases as higher interest rates encourages savings.

4. Decrease in the money supply can be used to control excess demand in the market, this will decrease the purchasing power of the consumer and the excess demand is controlled. As the excess demand is controlled, the prices come down and ultimately leads to a check over inflation.