As discussed before, economic depressions strengthen the currency while economic booms weakens the currency. When we increase the money supply we are able to increase demand. This is because consumers who were always willing to purchase more goods were unable to until they have acquired the financial ability to do so. When we give the people the financial ability to purchase more goods by either granting them newly printed money or by loaning them newly printed money we are able to increase demand.
As the chart indicates, stronger demand forces businesses to increase the volume of their goods. The increase in quantity is seen in Q1 vs Q2. However the national currency is further devalued as a result of inflation as seen in P1 vs P2. This is because businesses do not have the incentive to increase Q1 to Q2 without first demanding that they get paid more for each unit of output.
If the economy were to contract, first you would have to contract the money supply. You contract the money supply by increasing taxes, increasing interest rates, demanding businesses and consumers immediately pay back their loans, or whatever methods you choose. When the money supply contracts, so does consumer demand. D2 thus reverts back D1. The price of goods fall from P2 to P1. And businesses revert their production of goods from Q2 to Q1, thus causing the economy to have lost that surplus production of goods.
The reversion of P1 to P2 indicates that the price of goods have now fallen due to lesser demand. Thus economic contraction actually elevates the value of the national currency.
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