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In: Finance

Explain how the increase in the supply of money affects the real and nominal interest rates.

Explain how the increase in the supply of money affects the real and nominal interest rates.

Solutions

Expert Solution

All things being equal, an increase in the money supply will result in lower market interest rates. Conversely, a decrease in the money supply will raise the market rates. In the market economy, all prices are coordinated as per the supply and demand concept.

Nominal interest is the sum total of real interest rate and rate for inflation.
nominal interest charges= real interest rates + inflation rate
Real interest rates are the real value of money which depends upon demand and supply of money in an economic system. So, with an increase in money supply, real interest rates lower and so does nominal interest fees.
In the long term, because of multiplied cash supply and availability of reasonably-priced credit through banks, extra people hold cash for the transaction, precaution and speculative functions, savings and many others.
Now, for the reason that inflation rate has increased, in order to compensate, nominal interest rates too rise in the long term.

jeff jeffy answered 1 year ago
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