Money Supply:
- According to Hawtrey, trade cycle is a purely monetary phenomenon. Unplanned changes in supply of money may cause business fluctuation in an economy.
- An increase in the supply of money causes expansion in aggregate demand and in economic activities. However, excessive increase of credit and money also set ou inflation in the economy.
- Capital is easily available, and therefore consumers and businesses alike can borrow at low rates. This stimulates more demand, creating a virtuous circle of prosperity.
- On the other hand, decrease in the supply of money may reverse the process and initiate recession in the economy.
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