Supply of money and interest rate relationship

Money supply and demand impacting interest rates (video) | Khan Academy

supply of money and interest rate relationship

How Money Supply and Demand Determine Nominal Interest Rates interest rate and quantity of money demanded, the negative relationship. Read about the link between the supply of money and market interest rates, and find out why money supply alone can't explain interest rates. circulates in an economy, the money supply? • Central banks Expected returns/ interest rate on money relative . In the long run, there is a direct relationship.

supply of money and interest rate relationship

Maybe it looks something like that. That is our demand curve or our marginal benefit curve. Now, once again this is the exact same logic we use with the demand and supply curve for any good or service. - Money and Interest Rate Relationship

For money might look like this. Those first few dollars someone has a very low opportunity cost of lending it out, so, their willing to lend it out at a very low interest rate.

supply of money and interest rate relationship

Then every incremental dollar after that theirs higher opportunity cost, and people will lend it out at a higher and higher rate. Then you have a market equilibrium interest rate. Let me copy and paste this. Then we could think about what happens in different scenarios.

Now we have 2 scenarios that we can work on, and then let me just do 1 more. Let's think of a couple. Let's say that the central bank of our country, in the United States, that would be the Federal Reserve, the central bank prints more money.

Then decides to lend out that money. It is disturbed when central banks print money. The way that it enters into circulation in most countries is that the central bank then goes and essentially lends that money. The way it's done in the US Fed, most part they go out and buy government securities which is essentially lending money to the Federal Government.

They do that because that's considered to be the safest investment. They go out there and they lend money.

supply of money and interest rate relationship

If this is our original supply curve. If this is our original supply curve, but now your Federal Central Bank is printing more money and lending it out. What is going to happen over here? Your supply curve is going to shift to the right at any given price, at any given interest rate. Your going to have a larger quantity of money being available. It might look something like Assuming that's the only change that happens you see its effect. Your new equilibrium price of money, the rent on money, or the interest rate on money is now lower.

That's why when the Federal Reserves say I want to lower interest rates, they do so by printing money.

  • Money supply and demand impacting interest rates

They print that money, and they lend it out in the market. That essentially has the effect of lowering interest rates. Let's think about another situation. Let's say this is the Fed prints and lends money.

What is the Relationship Between Money Supply and Interest Rates?

Their lending the money by buying government bonds. When you buy a government bond, your essentially lending that money to the Federal Government.

supply of money and interest rate relationship

I've done other videos on that where we go into a little bit more detail on that. Let's think of another situation. Let's think about consumer savings go down. One interesting thing about savings, savings and investment are two opposite sides of the same coin. When you save money You have the whole financial system right over here. This is the finincial system.

supply of money and interest rate relationship

That money goes out and is lent to other people. For the most part, hopefully, that money when it's lent is used to invest in someway. If consumer savings goes down that means the supply of money will be shifted to the left.

At any given price and any given interest rate their be less money available. In this situation our supply curve is shifting to the left. Cash refers to the amount of currency and coin in circulation outside of bank accounts. Traveler's checks are issued by non-bank firms, such as American Express. Basically, the money supply is the amount of money that a nation has available at any given time.

Interest Rates Interest refers to the amount of money that a person pays to take out a loan. Financial institutions profit when they loan out a certain amount of money and require the borrower to repay the initial loan, plus an additional amount of money, which is a specific percentage of the loan.

Monetary Policy Interest rates have a direct impact on the amount of money in circulation. In the United States, the Federal Reserve, or Fed, raises and lowers the discount rate, which is the interest rate that it charges banks for borrowing money, to either constrict or expand the money supply.

When the Fed lowers the discount rate, banks lower interest rates in order to make more loans, which increases the amount of money in circulation. When the Fed wants to reduce the amount of money in circulation, it raises the discount rate, which results in higher interest rates and fewer loans.

References "Essentials of Economics"; Bradley R. Schiller; About the Author Marci Sothern has written as a tutor in the academic field since