Question

-Suppose the Bank Negara Malaysia change the quantity of money in the economy. How does this change affect the interest rate in the short run?
(8 marks)

-Suppose the Bank Negara Malaysia change the quantity of money in the economy. How does this change affect the interest rate in the long run?
(8 marks)

Answer 1

In short-run, an increase in the money supply will lead to a decrease in the nominal interest rate, which leads to an increase in investments. Conversely, a decrease in money supplies will tend to raise market interest rates, making it expensive for consumers to take out a loan.

In long-run, an increase in the money supply will decrease the real interest rate, which will increase investments and real output. On the other hand, if money supply decreases it will raise market interest rates, making it expensive for people to take loans.