Answer to Question #211793 in Macroeconomics for Riya

Question

Derive the demand for money using money demand and Money supply curve show how releif of interest with a decrease in money supply

Answer 1

when the interest rates increase, quantity of money demanded is always reduced. Interest rate reduction tends to increase quantity of the demanded money.

Generally, an increase in the money supply contributes to the interest rates falling. The Low interest rates similarly increase inflation, investment aw well as economic activity. 

 However, within liquidity trap, money supply increase will not have an impact when lowering the interest rates.

Relief of interest tends to decrease the money supply, causing money shortages at prevailing rate of interest. Hence, rate of interest should increase through minimizing the relief aspect.