The government is concerned about inflationary pressures that seem to be building within the nation. restricting the growth of money supply provides an effective strategy to reduce these inflationary pressures.

a. true
b. false

A. True

Explanation:

Restricting the money supply is one of the two methods adopted by governments under Monetary Policy, the purpose of which is to counter inflation and inflationary pressures.

Inflationary pressures arise as a result of excess supply of money in the markets or due to very low interest rates that encourage consumers to increase purchasing by taking credit. This takes to my next point, which is an increase in disposable income increases the purchasing power of consumers, leading towards excessive consumption, excessive consumption leads to increased demand for products and services. Increase in demand for products and services compels suppliers and manufacturers to supply and produce more and also likely to increase prices. Increase in prices of goods and services is what is termed as Inflation.  

Therefore, by controlling the money supply (usually through issuance of T-bills and govt. bonds) and/or increasing the interest rates (which discourages businesses from raising debt finance and stops consumers from excessive consumption) decreases demand for products and services and helps counter Inflation.

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