University of Central Florida (UCF) FIN4243 Debt and Money Markets Practice Exam 3

When a government expands the money supply excessively, it increases the amount of money circulating in the economy. This action can lead to inflation, as the availability of more money can lead to increased demand for goods and services. When demand outpaces supply, prices tend to rise, resulting in inflation.

This situation occurs because, as the money supply grows, consumers and businesses may be more willing to spend, potentially driving prices higher if the supply of goods does not keep up with the demand.

In the context of the other options, expanding the money supply does not necessarily bring more foreign investment, stabilize the currency, or strengthen it. In fact, excessive money supply growth can undermine confidence in the currency, leading to its depreciation rather than strengthening it. Thus, choice C accurately reflects the consequences of an excessively expanded money supply, highlighting the relationship between money supply and inflation.