Question

How does an increase in money supply affect interest rates?

Answer 1

The higher money supply in the market leads to lower interest rates and conversely lower money supply leads to higher interest rates.

EXPLANATION-

• The more money supply in the market leads to higher levels of cash liquidity. It means that more cash is available in the market for lending. So overall it is very easy to take a loan.
• It also means that more money is available for the banks to lend and to ease the competition they need to keep the interest rates as low as possible which lead to lower interest rates.