What can happen when the money supply expands?
Correct answer
Answer A: The amount of money in circulation can rise, and each unit can lose purchasing power.
Quick explanation
The money available is part of the money supply. If it grows sharply without a similar increase in goods and services, money can lose purchasing power.
Detailed explanation
Money represents claims on scarce goods and services. If new monetary units can be created without a reliable limit, the relative share represented by existing units can shrink. This is often called monetary dilution. For the store-of-value function, it therefore matters how predictably and credibly the supply of a form of money is governed.
Scarcity does not necessarily mean that new units must never be created. What matters is whether the rules are understandable and users can realistically assess future supply. Scarcity alone also does not make a good into good money. A unique stone can be extremely rare, yet hard to divide, difficult to verify and barely accepted.
Scarcity must therefore be assessed alongside usability, security, divisibility, transferability, verifiability and demand. It is an important property, but not an automatic guarantee of value or prosperity.
Example or everyday application
If tickets for a sold-out event could be printed without limit, each existing ticket would lose its special claim to a scarce seat. The logic is similar with money, although the economic relationships are more complex.
Common misconception
A larger money supply does not automatically create additional goods and services. Conversely, not every individual increase in the money supply causes an immediate or equally large increase in all prices.