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What Is the Relationship between Money and Economic Growth?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 31 May 2018
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The relationship between money and economic growth can be viewed from several angles.First, the most obvious angle is the fact that money is a well-recognized medium of exchange. Even though money is a major medium of exchange, it is not the only medium though, because other methods of exchange, including the use of credit, limit the function of money in an economy. Money also facilitates production, a macroeconomic factor that is vital for the growth of an economy. Perhaps one of the most important functions of money in terms of its role as a facilitator of economic growth is the fact that the manipulation of the rate of supply and ease of access to money in the economy is a useful tool for achieving desired economic growth.

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Even though the importance of liquid money in more developed economies is partially diminished by the effect of paperless money in the form of credit, money and economic growth are still related. In the area of production, the availability of money to foster the purchase of raw materials, equipment and other necessary items is a factor in the assessment of the link between money and economic growth. When there is adequate production of goods that is at par with the level of demand for such products, the economy will be able to maintain a healthy balance. In a situation where the producers and manufacturers are not able to access the funds needed to facilitate production, this will have an adverse effect on the growth of the economy.

Another relationship between money and economic growth is the manner in which the supply of money in the economy can be used a tool for achieving growth in the economy. Usually, an overstimulation of the economy as a consequence of an excess of demand and consumption normally results in an inflation. The occurrence of inflation in an economy is one of the inhibitors of economic growth since inflationary trends tend to cause a depression in the economy. In order to arrest this unwanted trend, monetary policies, involving factors like the mopping up of excess cash in the economy, may be used to control spending and also inflation.

The opposite of the above scenario may also be attributed as a factor in the link between money and economic growth. When the economy is not performing as expected, monetary policies, such as a reduction in the interest rates and fiscal policies that involve more spending on the part of government, may be used to introduce more money into the economy. The purpose of such actions are to spur the rate of consumption by the consumers.

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