Question

Respond to the following in a minimum of 175 words: Explain what happens to the interest rate if the money supply increases or decreases and the money demand remains unchanged. Explain what happens to the interest rate if the money demand increases or decreases and the money supply remains unchanged.

Answer 1

The reason for rising interest rate when money supply falls, banks have less money to lend which create shortage of money in banks so that people can invest. People now have to run more to get loans from the banks which raises the interest rate and vice versa. When money supply falls, interest rate rises and output falls to Y2. When money supply rises, interest rate falls to i1 and output rises to Y1.

Ixteret ms Rat Drifet

The reason for rising interest rate when money demand rise is that there are more number people who needs loans to invest in the market. Whenever there is high money demand, banks raise the interest rate to gain maximum profit and vice versa. When money demand rises/falls, only rate of interest rises/falls. It does not make any impact on level of output.

Energt Rate Date Dndauct