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8. What happens when too little money is in circulation?

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8. What happens when too little money is in circulation?

8. What happens when too little money is in circulation?

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MeredithElite · Tutor for 8 years

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The consequences of too little money in circulation include:1. Deflation2. Reduced Consumer Spending3. Decreased Economic Growth4. Increased Difficulty in Repaying Debts5. Lower Investment

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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.
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