Question

2. Money Supply and Interest Rates: The amount of money available in an economy plays an important role in determining interest rates. Generally speaking which of the following is true about the relationship between money and interest rates

• As the supply of money increases, it increases the supply of loanable funds, and interest rates tend to fall

• As the supply of money increases, it decreases the supply of loanable funds and interest rates tend to rise

• There is no relationship between money supply and interest rates

Answer 1

Generally speaking which of the following is true about the relationship between money and interest rates: as the supply of money increases, it increases the supply of loanable funds, and interest rates tend to fall.

All else being equal, a larger money supplylowers market interest rates, making it less expensive for consumers to borrow. Conversely, smaller money supplies tend to raise market interest rates, making it pricier for consumers to take out a loan. More money flowing through the economy corresponds with lower interest rates, while less money available generates higher rates.

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