Money, Interest Rates, And Exchange Rates - The Equilibrium Interest Rate: The Interaction of Money Supply and Demand
3 important questions on Money, Interest Rates, And Exchange Rates - The Equilibrium Interest Rate: The Interaction of Money Supply and Demand
Money market is in equilibrium when,
The money supply set by the central bank = aggregate money demand.
An increase in money supply will lead to,
lower interest rate that induces people to hold the increased available real money supply. People are holding more money than they desire, they use their surplus funds to bid for assets that pay interest, so interest rates are driven down.
Changes in output and interest rate,
- An increase in the real output (Y) raises the interest rate
- A decrease in the real output will lowers the interest rate
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