Question

1. what are the types of money supply?

2. what is the relationship between money supply and interest rate ?

Answer 1

1. The different types of Money supply are as follows:

a) M0 and M1- includes coins , notes and other money equivalents that can be converted into cash easily. They are also known as narrow money

b) M2- are short term time deposits held with the bank and also certain money market funds

c) M3- includes long term deposits . But, they are no longer included in the Federal Reserve reporting

2. Relationship between Money Supply and Interest Rates.

There is an inverse relationship between Money supply and Interest Rates. An increase in Money supply will result in lower interest rates, as result more funds are available with the people due to lower interest rates , therefore more private investment and also increases consumer spending. Whereas a decrease in Money supply will result in high interest rates. As a result, people are discouraged to take funds due to high interest rates, therefore private investment falls also lower income leads to lower consumer spending.