How does increasin money supply decrease interest rate or decreasing money supply increase interest rate?

Question

Ne1?

Answer 1

You have it backwards. The money supply is controlled by interest rates. Here's how it is done.
The Federal Open Market Committee (FOMC) is the part of the Federal Reserve that is responsible for decisions to increase or decrease the Federal Funds Rate. They do this through a process called open market operations. If the interest rate is raised, a call is placed to the New York Federal Reserve branch. This branch will then sell Treasury securities (issued by the US Treasury but used by the Federal Reserve to conduct monetary policy) to banks, lowering the amount of reserves that they have. Since reserves are multiplied by the reserve ratio to determine the total money supply, reducing these reserves lowers the money supply. Note, the reserve ratio is not changed. Only the amount held in reserves is changed. The Fed has not changed the reserve ratio in a long time, as it is easier to conduct monetary policy and comes as less of a surprise when it is done through open market operations. When the interest rate is decreased, the Fed buys Treasury securities held by banks by crediting their reserve accounts. These accounts then increase and will be multiplied by the reserve ratio, thus expanding the money supply.

Bottom line, the interest rates are used to control the money supply, not the other way around. This is accomplished by the Fed through open market operations.

Answer 2

An increase in money supply is typically created by the Federal Reserve by adjusting the Required Reserves Rate (RRR), or the amount of money that banks must hold on hand. If the RRR were to decrease a bank can then, hypothetically, lend more money and put more money onto the market.

Interest rates, however, are determined by the Fed Funds Rate. The Fed Funds Rate is the rate at which banks can borrow money from the Federal Reserve. A bank borrows at that which is then adjusted to Prime Rate. Prime Rate allows the lender to build in their share of the interest and allows them to earn money on the money they lend.

Answer 3

Lower interest rates cause expansion in the economy, and the supply of money rises. When interest rates are high, it causes the money supply to decrease. As the amount of money in the economy changes, interest rates will fluctuate accordingly.

Here is a site I found that can show you with examples and graphs: http://www.oswego.edu/~edunne/340chapter5_1.html

Answer 4

simple explanation:

interest rate is actually how much money is worth. higher interest rate means money you are willing to pay to take out a loan (loan is a way of saying you are "buying" money"

so whenever you increase supply of anything the value of it will decrease. so when you increase the supply of money you decrease the value of it, and when the money is less valuable interest rates go down in order to try to get more people to take out loans (i.e. buy money)


the FOMC also trys to play around with interest rates in order to change the value of money (so they lower interest rates in order to try to get people to "buy" money by increasing the supply)

Answer 5

AS Curve (Orange): c) continues to be the place that's advert Curve (Blue): b) strikes leftward and Downward exchange in economic furnish and costs of activity do no longer impact the present production skill, then AS curve shop the place that's. exchange in economic furnish and costs of activity is a gadget used by using policymakers to change the mixture call for and acquire particular ends up in some macroeconomic variables. an strengthen in real costs of activity potential a relief of mixture call for by using the relief of all the call for of stable and centers made by using credit mechanism.