Final answer:
When the money supply (M1) grows faster than the economy, it can lead to inflation, hyperinflation, economic downturn, and worsened economic conditions.
Step-by-step explanation:
When the money supply (M1) grows faster than the economy itself, it can lead to inflation and an economic downturn. The excessive increase in money supply can cause prices of goods and services to rise at an unsustainable rate. This rapid increase in prices may lead to hyperinflation and a loss in the value of savings.
Furthermore, when the money supply grows faster than the economy, it can create a leverage cycle where borrowing increases and credit becomes easily available. However, this surge of lending can contribute to asset bubbles, like stock or housing markets, which can burst, leading to a crash and worsened economic conditions.
It is important for the money supply to grow at a sustainable rate in line with the growth of the economy to maintain stable prices and avoid economic instability.