ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A nation’s money supply and interest rates have an inverse relationship. This means interest rates should be lower if there is a higher supply of money in a country’s economy. Conversely, rates should be higher if the money supply is lower.

Detailed explanation-2: -As the interest rate falls, money demand will rise. Once it rises to equal the new money supply, there will be no further difference between the amount of money people hold and the amount they wish to hold, and the story will end. This is why (and how) an increase in the money supply lowers the interest rate.

Detailed explanation-3: -An increase in the interest rate reduces the quantity of money demanded. A reduction in the interest rate increases the quantity of money demanded. The demand curve for money shows the quantity of money demanded at each interest rate.

Detailed explanation-4: -Answer: When the money supply increases it means that more money is available in the economy for borrowing and this increased supply, in line with the law of demand tends to reduce the interest rates, or the price for borrowing money down.

Detailed explanation-5: -Demand-pull inflation occurs when consumers demand goods, possibly because of the larger money supply, at a rate faster than production. Cost-push inflation occurs when the input prices for goods tend to rise, possibly because of a larger money supply, at a rate faster than consumer preferences change.