Spending money in the economy is good until inflation becomes a factor. Due to the rising levels of debt, the risk of inflation is high. As the demand for products and services is increasing, producers increase the prices and can ultimately cause inflation. The government needs to help stabilize the rate of inflation as it decreases the wealth of every citizen. Being able to stabilize inflation is important as it prevents hyperinflation which will destroy an economy (pg 62). Germany in the …show more content…
In fact, the government needs to consider implementing another contractionary monetary policy. This time, they should decrease the money supply in the economy. If the Bank of Canada, decreases the money supply, it will raise interest rates and will decrease the spending in the economy (pg 158). The reason why interest rates will rise when the money supply decrease is due to the fact that the money demand curve is downwards sloping. This means that as more money is taken out of the economy, the interest rate will slowly increase. At this time, the government needs to decrease the money supply as it helps slow down the economy and will help prevent another