8. What is the relationship between real money demand and interest rate? (Please justify)

Expert Solution

The organic market impacts the demand and supply of money—and the activities of the Federal Reserve and business banks. The Federal Reserve sets the rates of interest, which figure out what banks charge each other to get cash, what the Fed charges banks to acquire some money, and what the buyer needs to pay to obtain some cash.

Setting rates of interest include evaluating the quality of the economy, expansion, joblessness and supply, and request. More cash coursing through the economy compares with lower financing costs, while less cash accessible creates higher rates.

Rates of interest additionally reflect hazard premium—how much hazard the two borrowers and banks are happy to take on.

The cash supply in the United States varies depending on the activities of the Federal Reserve and business banks. By the law of supply, the loan fees charged to acquire cash will, in general, be lower when there is a more amount of it.

In any case, showcase chance is another weight on financing costs that considerably impacts them. Financial specialists call these double capacities "liquidity inclination" and "hazard premium."

Rahul Sunny answered 7 months ago

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