Question

The economy goes into decline, and many people suffer monetary loss. Which reason best explains why the federal government would not print more money to increase the supply of currency?
a. The currency would have no value.
b. The value of the currency would decrease.
c. The value of the currency would increase.
d. The value of the currency would remain the same.

Answer 1

Answer:

The correct answer is Option "b. The value of the currency would increase"

Explanation:

The government through the central bank can adopt a variety of measures to control the amount of money supply in the economy. The state uses a combination of monetary and fiscal policies to this effect.

In the given example, the federal government would not print more money due to the implications it has not only on the value of the currency but also on other macroeconomic variables such as interest rates and inflation.

By printing money, there would be an excess amount of money supply in the economy. That would make each dollar in the economy worth less than what it was before. This puts downward pressure on interest rates and boosts inflation as well.

Due to higher inflation, a greater amount of money would be required to continue with normal business which would again cause the need to further increase money supply. Using the law of simple demand and supply, the value of money would keep lowering as money supply is kept increasing. This is why a government might elect to not print money.