Answer to Question #89196 in Macroeconomics for BRENDA

Question

Explain how the increases and decreases in the supply of money and the demand for money can impact interest rates and why.

Answer 1

When the money supply increases, people will have more money for spending. Some money they will spend for goods and services, the rest they will deposit in banks. When money reserves grow in bank system, banks try to stimulate borrowing by lower interest rate.

If supply of money decreases, the amount of money declines and banks have to use higher interest rate to attract more money.

The same situation with the demand for money. If banks and markets need more money for investment, they will propose higher interest rate to attract more lenders.

If there is excess of money, all loans become available and the price of money (interest rate) decreases.