Central banks use several ways through which they can influence the money supply. Changes in money supplies are backed by different economic reasons and central banks, by following monetary policies, increase or decrease the money printing. Majorly, increase in money supply is regarded as an alarming situation for the economic condition.
The simple way of boosting the money circulation in the economy is by printing more money. By doing this, the central banks can change the overall economic conditions due to increasing inflation and interest rate. The increasing money supply also devaluations the currency value.
Why central banks increase money supply?
No doubt, increased money supply increases the inflation rate but this mechanism is also to prevent deflation which is opposite to inflation. Deflation causes the purchasing of goods to go down. Due to declining prices, people delay their purchasing and firms eventually fall. Another reason for increasing the money supply is when domestic banks run out of money for loan purposes, the central bank starts to print more money to provide cash for loans.
Additionally, the increasing money supply also decreases the value of the currency in international markets due to which the exports of the country become cheap. This increases the demand for exports and increasing exports have a huge impact on the gross domestic product of the country.
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