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: -In the short-run, an increase in the money supply decreases the nominal interest rate, which increases investment and real output.

Detailed explanation-3: -An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production.

Detailed explanation-4: -When expected inflation changes, the nominal interest rate will increase. However, inflation will not affect the real interest rate.

Detailed explanation-5: -Generally, the nominal demand for money increases with the level of nominal output (price level times real output) and decreases with the nominal interest rate. The real demand for money is defined as the nominal amount of money demanded divided by the price level.