Question

Why does the Money supply need to be controlled?

Answer 1

Money supply needs to be controlled because excessive amount of money supply will lead to the inflation in the economy, therefore, it is necessary to control the money supply in order to control the inflation. When the money supply increases, the rate of interest in the economy decreases which will lead to increase in the production and income level that increases the purchasing power of the people in the economy. As the purchasing power of the people increases, they will demand more goods and services which will lead to increase in the prices and thereby inflation.