Question

Why might a falling money supply signal an impending recession?

Answer 1

Monetary policy and money supply are very important tool for any economy to check its growth rate. If these are not properly implemented then there will trouble like a great recession as we can see in the year 2008.

So when there is fall in money supply(say for example by FED) then there will money was given by bank at higher rates which mean there will fewer people who take the money and this will cause less investment and growth for an economy

This will also affect many factors like employment, development, inflation and ultimately might end up with a recession in the long run.