Money supply

Obviously, the amount of money in the economy has a significant impact on economic activity.

Excessive growth in the money supply often causes inflation as it means that the public has increased spending power. On the other hand, sharp cuts in the money supply can cool off an overheating economy, or even lead to a recession.

If the economy is doing well, a fall in the money supply will be welcomed by the stock market, because it will probably lead to lower inflation rates. Conversely, if the money supply increases when the economy is doing well, investors will be concerned that excess available money will mean higher inflation rates.