A decrease in the money supply will:

A decrease in the money supply will:

• A. Increase inflation.
• B. Slow the economy.
• C. Increase GNP.
• D. Help the housing industry.

Answer: (B)

When the money supply shrinks, liquidity in the economy tightens and borrowing costs rise. Higher interest rates make it more expensive to take out loans, so consumers cut back on big purchases and businesses delay or scale back investment. With less spending and investment, overall demand falls, production slows, and economic growth slows. Housing tends to take a hit too because higher mortgage costs deter home buying. Inflationary pressure eases as demand cools, but the main effect of a reduced money supply is a slower economy. That's why slowing the economy is the best answer.

When the money supply shrinks, liquidity in the economy tightens and borrowing costs rise. Higher interest rates make it more expensive to take out loans, so consumers cut back on big purchases and businesses delay or scale back investment. With less spending and investment, overall demand falls, production slows, and economic growth slows. Housing tends to take a hit too because higher mortgage costs deter home buying. Inflationary pressure eases as demand cools, but the main effect of a reduced money supply is a slower economy. That's why slowing the economy is the best answer.