Growth of money supply is an important factor not only for acceleration of the process of economic development but also for the achievement of price stability in the economy.
There must be controlled expansion of money supply if the objective of development with stability is to be achieved. A healthy growth of an economy requires that there should be neither inflation nor deflation. Inflation is the greatest headache of a developing economy.
A mild inflation arising out of the creation of money by deficit financing may stimulate investment by raising profit expectations and extracting forced savings. But a runaway inflation is highly detrimental to economic growth. The developing economies have to face the problem of inadequacy of resources in initial stages of development and it can make up this deficiency by deficit financing. But it has to be kept strictly within safe limits.
Thus, increase in money supply affects vitally the rate of economic growth. In fact, it is now regarded as a legitimate instrument of economic growth. Kept within proper limits it can accelerate economic growth but exceeding of the limits will retard it. Thus, management of money supply is essential in the interest of steady economic growth. By money supply we mean the total stock of monetary media of exchange available to a society for use in connection with the economic activity of the country.