ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -What Is the General Connection Between the Money Supply and Interest Rates? 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: -This means that a change in the interest rate has no effect on the quantity of money supplied. The demand curve for money though is downward sloping. As the interest rate falls, the quantity demanded for money rises because it becomes cheaper to borrow.

Detailed explanation-3: -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-4: -You have supply of money (by central bank) and then you have demand for money by people. Interest rate ensures that demand for money = supply of money. If supply increases (shift to the right) interest rate has to decrease otherwise people would not be willing to get and hold that additional money.