Question

1. Explain impact of 1) increase and 2) decrease of interest rate on money supply.

Answer 1

Answer -

1) When there is higher interest rates, the cost of borrowing becomes expensive or people stop borrowing as the interest that have to be paid is high. In this situation, when money supply is low, Financial Institutes are forced to increase interest rates by which borrowing become more costlier.

2) When there is low interest rates, the supply of money in the market rises. As a result, prople are motivated to borrow money from financial institutes. In brief when there is excess of money suply in the market, financial institutes decreases intereat rates to motivate people to take loan.