What are some limitations on the money expansion process?
The concept of expanding the money supply involves some different activities. One way that the government can increase the money supply is by printing more money. This, however, usually has negative consequences for the economy because it will lead to significant inflation. When more money is being printed, people will have access to that money. People with the ability to spend more money will create an increased demand for products. Unless the supply of products also increases, the result will be inflation.
Another way the government can increase the money supply is to lower interest rates. This is usually done to stimulate the economy. When interest rates drop, people may be more willing to take loans to create new businesses or to expand existing businesses since the cost of borrowing will decrease. However, the key to this working is that people need to actually take the loans to create the jobs that will help the economy grow. If interest rates drop and investment doesn’t increase, the economy will likely not grow.
Regarding the process of expanding the money supply, in theory, the government could expand the money supply as much as it wants by simply creating more money. However, there are at least two limits on this process.
One limit is inflation. If the government simply creates too much money, inflation will occur. The inflation will eat away at the value of the money that the government has created and will, thereby, reduce the real expansion of the money supply.
A second limit is the value of the money multiplier. For example, the government can try to create more money by lowering interest rates so that more people will borrow. But if people are not willing to borrow (because, for example, businesses are afraid to expand), the multiplier effect for any increase by the government will be reduced.
These factors limit the money supply's ability to grow.