Question

There is a 5% increase in the money stock. How will that impact interest rates, the quantity of money demanded, and inflation?

Answer 1

IF there is a 5% increase in the money stock or increase in the money supply , it will lead to decrease in the interest rate because, as more money in the economy , or money supply increase which means banks have now more money to lend . Therefore they can lend at lower interest rate to lend maximum amount of money and thus it will lead to decrease in the interest rates. The quantity of money demanded increases because of demand of money curve sloping downward to interest rate , when interest rate is decrease , the demand for money increase. and the inflation rate increases, because as the money supply increease , the interest rate falls, and thus new business can start, unemployment will fall, and people have more money and thus which will increase the aggregate demand in the economy and thus lead to inflation or increase in the general price level.