Pros of decreasing the money supply:
Cons of decreasing the money supply:
- Pros:
1. Decreased inflation: By reducing the money supply, there will be less money in circulation, leading to a decrease in overall demand and subsequently lower inflation rates.
2. Increased value of currency: With a decreased money supply, the value of the currency is likely to increase, making imports cheaper and exports more expensive, thus reducing trade deficits.
3. More stable economy: By controlling the money supply, central banks can help stabilize the economy by reducing the likelihood of rapid and uncontrollable inflation or recession.
- Cons:
1. Reduced economic activity: A decrease in the money supply can lead to a decrease in consumer spending, business investment, and overall economic activity, potentially leading to a recession.
2. Higher interest rates: With less money available for borrowing, interest rates are likely to increase, making loans more expensive and potentially slowing down economic growth.
3. Increased unemployment: The contraction of the money supply can also lead to lower levels of investment and hiring by businesses, resulting in higher unemployment rates.