How do changes in interest rates affect the money supply? }] {Section title=?context? !!!Economic Variables: There are many variables that can ultimately affect economic conditions

Business Dec 16, 2020

How do changes in interest rates affect the money supply?

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{Section title=?context? !!!Economic Variables: There are many variables that can ultimately affect economic conditions. These variables are often closely related to one another, and changes in one specific area are often later seen in other areas of the economy.

Expert Solution

Money supply and interest rates are inversely related, which means that if either one gets larger, the other will become smaller. Generally, an increase in interest rates will increase the cost of borrowing, leading to reduced investment and consumption, and also to greater savings. Each of these factors will cause the overall money supply to go down. Conversely, as interest rates go down, investment and consumption rise and the money supply will go up.

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