Money supply and demand impacting interest rates (video) | Khan Academy
The purpose of this study is to investigate the relationship between money supply , interest rate and inflation rate in Turkey after the Economics is a social science that studies the effects of consumer behavior in relation to a nation's monetary policy, supply and demand and other economic. This answer is taken from the question: “Which direction is the causal relationship between money supply and interest rates? Do interest rates affect money.
By Marci Sothern ; Updated September 29, Interests rates determine how much money a nation has in circulation. Money is anything that is generally accepted as a medium of exchange, such as coins, cash, debit cards and checks.
It underpins every nation's economy. Every nation prints, or mints, its own money.
What is the Relationship Between Money Supply and Interest Rates? | Synonym
However, a central bank controls the money supply in most nations. Money Supply The money supply refers to all of the money held by the public, including transaction account balances, cash or traveler's checks. A transaction account is a bank account that allows direct payment to a third party. 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.
Their lending the money by buying government bonds. When you buy a government bond, your essentially lending that money to the Federal Government.Y1/IB 31) Monetary Policy (Interest Rates, Money Supply and Exchange Rate)
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.
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. That would increase interest rates. Then you could even make an argument that if consumers savings is going down consumers are going to borrow less as well. You could argue that maybe demand would go up as well.
Your demand could go up and that would make the equilibrium interest rate even even higher.
Let's do another scenario. Let's say that the Federal Government in an effort to The government decides to borrow a lot more money. The government is essentially going expand it's deficit.
The government is going to borrow money. Here our supply isn't changing. I'm assuming the Central Bank isn't changing it's policies, how much it's printing. Savings rates aren't changing.
Offering different interest rates can increase the loan products offered by banks in the economic marketplace. For example, nations can set high fixed interest rates on short-term loans because banks are unable to generate sufficient interest on these loans. Consumers may pay these higher rates if they have an intense need for immediate capital funding, even though the loan will cost more money.
Lower fixed interest rates on long-term loans can increase money demand for capital investments or major purchases.
How Does Fixed Interest Rate Affect Money Supply & Demand?
Central reserve banks may increase interest rates to contract the money supply by offering attractive government investments to individuals and businesses.
This removes money from the marketplace and slows economic growth. Lowering federal interest rates charged to commercial banks can increase the money supply because banks can now invest extra capital into businesses through loans or other investments.