How does reducing the supply of money help reduce inflation?

A2A: The amount of money that people prefer to hold is bounded in both directions. If the supply of money decreases, many people will be left with less money than they are comfortable with and decrease their spending to save up. The market respond... read more

The market responds by lowering prices. At some point the fall price level causes people to prefer a lower amount of money. Inflation is the opposite process, where people spend money to get rid of excesses. If inflation is the norm, then a modest reduction of the money supply only decelerates inflation. read more

T-bonds are debt, but have the effect of reducing the money supply (i.e. the money in circulation), so that inflation decreases as a side-effect. Decreasing velocity of money is another common way of reducing inflation. In this scenario, the central bank will increase its benchmark interest rate. read more

Reducing spending is important during inflation, because it helps halt economic growth and, in turn, the rate of inflation. There are three main tools to carry out a contractionary policy. The first is to increase interest rates through the central bank, in the case of the U.S., that's the Federal Reserve. read more