Answer to Question #227796 in Macroeconomics for fatima

Question

How does the response of the interest rate to a change in the money stock depend on the

interest sensitivity of money demand? 

Answer 1

The nominal interest rate varies when the Federal Reserve adjusts the amount of money in an economy. When the Fed expands the money supply, there is a money surplus at the current interest rate. The interest rate must be reduced for economic actors to be willing to keep the extra money.

The rise in Y raises the need for money. If money demand is susceptible to interest rates, then a relatively modest rise in interest rates is all that is required to lower money demand and restore money market equilibrium.