Emma "... we would not accept the answer if they typed an extra letter so why do we feel the need to remove extra spaces for them?"
Well, these are two really different cases. In the good old days of handwritten exercises, a teacher would never have measured the blank space separating two words and counting extra large spaces as "incorrect" the same as extra letters would be counted incorrect in student's answers.
If you were using a Moodle quiz's SA questions to test a student's knowledge in typography or Web design, then the extra blank spaces might be counted "incorrect". But I doubt that that is a typical use of the Moodle quiz. In my experience, it is not infrequent that students unconsciously type 2 consecutive blank spaces (leaving their thumb too long on the space bar), do not "see" it, and wonder why their answer is counted as "incorrect" in a quiz.
So I think it would be sensible to automatically remove any extra blank spaces from the students' answers in quiz. No need to make it yet one more "option" on the already cluttered question editing screen.
Joseph