if there is a decrease in the money supply that causes money to gain purchasing power and leads to deflation what happens to prices

Question

Jessica

Mathematics

9 May, 04:48

if there is a decrease in the money supply that causes money to gain purchasing power and leads to deflation what happens to prices

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Answers (1)

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Chan · Answer 1

The prices fall

Step-by-step explanation:

Deflation happens naturally when the money supply of an economy is fixed. When money gain purchasing power, the producer need less capital to produce their product, which means that they can afford to sell their product with lower price. This allows one to buy more goods and services than before with the same amount of currency. So the price of money fall as there is a decrease in money supply.