What happens to interest rate when money supply increases?


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Jack Buckby answered
The interest rate always changes and is affected by a number of things; you must understand that before continuing your research. The interest rate is constantly changing and is affected by the economy all of the time.

  • So how do interest rates affect the economy?

Economics is influenced really quite massively by the interest rates in the country and the economy. When the rate of interest is really high, the people that contribute to the capitalist economy won't be interested in taking out loans or credit from their chosen institution because it's harder to pay back the money that is owed.

When the interest rate is high, the amount of cards and the amount of homes being sold throughout the year actually go down. But you must remember that the opposite is true. So when the interest late is sufficiently low then the amount of homes and cars sold during the year will increase, given that credit becomes much easier to pay back. You will pay back less on every pound that is borrowed. Hence, when the interest rate is low the government is making an effort to get the economy going and to get more people spending.

  • When money supply increases, what happens to interest rates?

Quantitative easing results in the strength of a currency decreasing. If you increase the quantity of something, its value will decrease - that is why rare goods are so expensive. Because of this, the government will proceed to increase interest rates in order to encourage an inflow of hot money in the economy that can yield more foreign investment and increase the demand of a currency after its devaluation.

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