How does money supply affect interest rates?

Question

Can someone tell me in depth why this happens? Some examples?

Answer 1

I am not going to go in depth because I dont want to type that long but in a nutshell the more scarce the money supply, the higher the interest rate.

The Federal Open Market Committee sets the federal funds rate by exchaning t-bills with the major banks. When they want to raise interest rates they sell t-bills in exchange for cash, taking available cash out of the open market and thus putting upward pressure on the fed funds rate, which in effect drives longer term rates.

When they want to lower interest rates they do the opposite, buying back t-bills in exchange for cash. This puts more cash on the open market and forces the banks to lower their rates as the increased cash puts downward pressure on rates from the increased supply.

It is much more complex than that and you need to do more research but that is how it works on the most rudimentary level

Answer 2

This is a difficult subject matter to be discussed in depth. Normally too much money supply , interests rates are low, and vice versa, but then with the modern economy, there are other factors that affects interest rates.

I suggest you research the IMF website, they have tons of papers about this .

Answer 3

money is not the answer

Answer 4

GREED