Question
8. What happens when too little money is in circulation?
Answer
4.1
(156 Votes)
Meredith
Elite · Tutor for 8 years
Answer
The consequences of too little money in circulation include:1. Deflation2. Reduced Consumer Spending3. Decreased Economic Growth4. Increased Difficulty in Repaying Debts5. Lower Investment
Explanation
When there is too little money in circulation within an economy, several things can occur. These are:1. **Deflation**: With less money available, the value of money increases, which can lead to deflation. Deflation is a decrease in the general price level of goods and services. While this might seem like a good thing for consumers, it can actually discourage spending, as people might postpone purchases expecting prices to fall further.2. **Reduced Consumer Spending**: Consumers may have less money to spend on goods and services, which can lead to a decrease in consumer demand.3. **Decreased Economic Growth**: With reduced consumer spending, businesses may see a decline in sales, leading to lower profits, reduced production, and potentially layoffs or higher unemployment rates.4. **Increased Difficulty in Repaying Debts**: Deflation increases the real value of debt, making it more difficult for borrowers to repay their loans. This can lead to higher default rates and can strain financial institutions.5. **Lower Investment**: Both businesses and individuals may be less inclined to invest if they expect prices to fall or if they are uncertain about future demand for goods and services.