<p>According to standard monetary equation:</p>

<p><span class="math-container">$$MV=PY$$</span></p>

<p>Where <span class="math-container">$M$</span> is the money supply, <span class="math-container">$V$</span> velocity of money, <span class="math-container">$P$</span> price level and <span class="math-container">$Y$</span> real output. And where the‘value’ of money is inversely proportional to the price level <span class="math-container">$P$</span>, we can rearrange the above for <span class="math-container">$P$</span> to see how it changes when parameters change and from that we can infer what happens to the value of money:</p>

<p><span class="math-container">$$P=\frac{MV}{Y}$$</span></p>

<p>Hence if the money supply goes down and velocity and output stays the same the <span class="math-container">$P$</span> will decrease and money become worth more. Important caveat is that both velocity and output might not stay constant. If real output decreases faster than the decrease in money supply then the price level would still increase and value of money decrease. Also, in more complex models expectations play big role. If the change in money supply is expected to be reversed in near future it might not affect price levels and the relationship might not hold at 0 lower bound (see the influential paper from Krugman on this <a href="http://here" rel="nofollow noreferrer">here</a>).</p>

CC BY-SA 4.0
2020-01-02T13:28:07.983Z
2020-01-02T13:28:07.983Z
1muflon1
<p>1 - Interest rates (the price of liquidity) will rise assuming demand for cash outweighs the new figure for availability of notes.</p>

<p>2 - Prices will eventually go down (lower inflation) as merchants can't find customers with enough cash to buy their products, they will eventually be forced to lower their prices or...</p>

<p>3 - A move to online channels and payments (maybe, but not necessarily, depends on infrastructure and government push).</p>

CC BY-SA 4.0
2020-06-01T14:31:18.273Z
2020-06-01T14:31:18.273Z
tvbc
<p>The central bank of Iraq has significantly reduced the note count from 55 Trillion to 5 trillion.  </p>

<p>Logic would dictate that when a supply is reduced the value of the item that has been reduced will go up. </p>

<p>Is this incorrect thinking? And if so, what is the correct way to look at this?</p>

CC BY-SA 4.0
2020-01-03T03:43:52.723Z
Redenomination frequently happens when there is hyper-inflation. Is this a question about what happens if a county randomly decides to reduce available currency (natural experiment) or if they do so under typical circumstances like because of operational issues due to inflation or to fight the black market (what happens on average when this happens)?
BKay
<central-banking><money>
What happens when a country's central bank significantly reduces the available currency?
Cam
# What happens when a country's central bank significantly reduces the available currency?

(Asked by: username_0 on 2020-01-01)

The central bank of Iraq has significantly reduced the note count from 55 Trillion to 5 trillion.

Logic would dictate that when a supply is reduced the value of the item that has been reduced will go up.

Is this incorrect thinking? And if so, what is the correct way to look at this?

**Tags:** central-banking, money
> **Comments:**
> **username_1**: Redenomination frequently happens when there is hyper-inflation. Is this a question about what happens if a county randomly decides to reduce available currency (natural experiment) or if they do so under typical circumstances like because of operational issues due to inflation or to fight the black market (what happens on average when this happens)?  

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## 2 answers

### Answer by username_2 on 2020-01-02. Score: 1

According to standard monetary equation:

$$MV=PY$$

Where $M$ is the money supply, $V$ velocity of money, $P$ price level and $Y$ real output. And where the‘value’ of money is inversely proportional to the price level $P$, we can rearrange the above for $P$ to see how it changes when parameters change and from that we can infer what happens to the value of money:

$$P=\frac{MV}{Y}$$

Hence if the money supply goes down and velocity and output stays the same the $P$ will decrease and money become worth more. Important caveat is that both velocity and output might not stay constant. If real output decreases faster than the decrease in money supply then the price level would still increase and value of money decrease. Also, in more complex models expectations play big role. If the change in money supply is expected to be reversed in near future it might not affect price levels and the relationship might not hold at 0 lower bound (see the influential paper from Krugman on this [here](http://here)).


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### Answer by username_3 on 2020-06-01. Score: 0

1 - Interest rates (the price of liquidity) will rise assuming demand for cash outweighs the new figure for availability of notes.

2 - Prices will eventually go down (lower inflation) as merchants can't find customers with enough cash to buy their products, they will eventually be forced to lower their prices or...

3 - A move to online channels and payments (maybe, but not necessarily, depends on infrastructure and government push).


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