Part 1. Respond to the following in a minimum of 175 words:
Explain what happens to the interest rate if the money supply increases or decreases and the money demand remains unchanged. Explain what happens to the interest rate if the money demand increases or decreases and the money supply remains unchanged.
Part 2. Reply to the following thread in a minimum of 100 words:
“Interest rates are affected by an increase or decrease in the money supply in the economy. This is also dependent on whether the demand remains constant or changes. An increase in the money supply will lead to a decrease in the interest rates as long as the money demand remains unchanged (Cebiroglu & Unger, 2017). The financial institutions drop their interest rates to motivate people to borrow and make investments. A decrease in money supply, on the other hand, will lead to an increase in interest rates as long as the money demand remaining unchanged. In this case, there is a general shortage of money in the market, which forces financial institutions to increase the interest rates being offered to reduce the rate of borrowing as many people will not able to meet the high-interest rates.
An increase in money demand leads to a reduction in interest rates. This is the case assuming the money supply remains the same. There is an increased need for money, which in turn leads to the interest falling as people seek to utilize the funds in several investments. There is also an increase in borrowing occasioned by the lower interest rates witnessed in the country. This is opposed to when it comes to a decrease in money demand. A decrease in money demand increases interest rates (Cebiroglu & Unger, 2017). There is a reduction in the market for the need for money, which in turn leads to the cost of borrowing going up as interest rates already plummeted. Money demand is inversely related to interest rates as an increase in demand leads to a reduction in interest rates while a decrease in money demand leads to an increase in interest rates.” – Lacey E.
Cebiroglu, G., & Unger, S. (2017). On the Relationship of Money Supply, Consumer Demand and Debt. Consumer Demand and Debt (February 24, 2017).
Part 3. Respond to the following post in a minimum of 100 words:
“The interest rate will decrease as the money supply increases as long as the demand for money stay unchanged. With more money in circulation and the same amount of demand for it, people will have more money in general and take less loans at high interest rate. When the money supply decreases and the money demand stays the same this will increase interest rates for the opposite reason. With less money in circulation the people are far more willing to take loans with higher interest rates to get what they want.
When the supply levels of money go up and down the inverse happens to the interest rates. For when the money demand goes up and down the same thing happens.
When money demand goes up, and supply stays the same, interest rates go up since the people are willing to once again take larger interest rates. When the money supply goes down the interest rates will also go down. Watching the economy and paying attention to these things can greatly help to determine whether or not people should take out loans.” – Orrin M.