Money Supply And Interest Rates Flashcards, test questions and answers

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What is Money Supply And Interest Rates?

Money Supply and Interest Rates have a significant relationship in economics. Money supply is the total amount of money circulating in an economy at any one time, which includes physical currency, coins, checks, and other forms of money such as credit card debt or bank deposits. The level of money supply affects the availability and cost of credit for businesses and consumers alike because it determines the amount banks can lend out. When there is more money available to lend, businesses are able to borrow at lower interest rates to finance their operations or expansions. On the other hand, when there is less money available to lend, banks raise interest rates to protect themselves from losses due to defaulted loans. Interest rates on loans also influence consumer spending habits since they determine how much consumers need to pay back after taking out a loan. Higher interest rates make it more expensive for people to borrow which causes them to spend less than they would if interest rates were lower. Similarly, low-interest rates mean that borrowers are likely going to take out more debt and spend more than usual in order increase consumption levels within an economy.. Therefore changes in the levels of money supply can be used by central banks as a tool for managing economic growth by either increasing or decreasing interest rate levels depending on whether aggregate demand needs boosting or slowing down respectively . Overall Money Supply and Interest Rates are linked through their effects on both business investment and consumer spending behaviours; with high monetary supplies leading business investment decisions being taken advantage of by low-interest rate environments while conversely reducing consumer spending behaviour due higher borrowing costs associated with high-interest rate policies set by Central Banks.