University of Central Florida (UCF) ECO3223 Money and Banking Practice Exam 1

When there is too little money in the economy, it can lead to deflation. Deflation is characterized by a general decline in prices for goods and services, which happens as consumers and businesses reduce spending as a response to the lower money supply. With less money circulating, demand for products decreases, leading sellers to lower prices to encourage purchasing.

In contrast, when money is scarce, the overall economic activity tends to slow down — businesses may struggle to sell their products, and consumers may hold off on purchases, exacerbating the decrease in demand. As confidence in the economy diminishes further, this can lead to a downward spiral where decreased spending continues to push prices lower.

In this context, the choice indicating that prices remain constant does not align with what typically occurs during a situation of insufficient money supply; instead, it is the case that prices are likely to fall, resulting in deflation. Thus, the first choice accurately describes the relationship between a lack of money in the economy and the resulting economic conditions.