Models of Determination of Interest Rates Essay

The money supply will increase as the components of AD (C+I) rise. Figure 2 illustrates the increase in money supply through showing the rightward shift of the MS curve, from MS1 to MS2. The money demand will remain the same (MD). Therefore, increasing the money supply will lower the interest rate from i1 to i2. This is partly due to the increased availability of money. More money around means it is easier to acquire and thus command lower interest rates. However, such an increase in money supply may also increase the inflation rate and possibly cause a hyperinflation if uncontrolled.

Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left.

Money makes the world go round. We use it for just about anything, for example, paying bills, buying toys for the kids, getting the holiday ingredients for the family secret recipe, and we even use it as a gift for others. It adds value to some yet adds less to others. But what would happen if the supply of money was to suddenly decrease..or increase? Every bit of money you spend or receive is part of a complex organization known as the Federal Reserve System. The Federal Reserve System acts somewhat like the banks of all banks within the United States that controls our money supply by setting interest rates that can affect our economy. Determining how much you can buy or if you should buy now. The federal reserve should set a fixed interest

Higher interest rates are never a good idea for a growing economy because it can directly impact it. Higher interest rates can affect

This causes the price and the quantity move in opposite directions in a supply curve shift. Also, if the quantity supplied decreases at any given price the opposite will happen.

When there is a change of one of the factors of supply- like changes in the prices of production inputs like labour or capital; a change in production technology and its associated productivity change; or the amount of competition in a specific product market- there is a corresponding change in the supply curve. For example, if worker productivity improves due to some human capital or technology investment, then the costs of production decrease. This exerts a positive effect on the supply curve shifting it right, where the new market equilibrium is at a higher quantity and a lower price, holding everything else constant. There can also be a negative shift that moves the supply curve to the left, with the resulting market clearing price being higher and quantity lower, ceteris

Increase in interest rates makes borrowing an expensive affair and in turn killing the demand for loans and other related products and hence negatively impacting

Money supply basically means “money stocked” it is the total amount of monetary assets available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in

In the United States banks operate under the Fractional Reserve System. This means that the law requires banks to keep a percentage of their deposits as reserves in the form of vault cash or as deposits with the nearest Federal Reserve Bank. They loaned out the rest of their deposits to earn interest. Such banking practices formed the basis for the banking system's ability to "create" money. I think one of the important benefits of fractional reserve banking is it pools together a lot of smaller savings, and it's able to lend it out in a variety of markets, some of them to big business but also to smaller enterprise and to households—institutions that banks,

Federal governments through the central banks bear the role sustaining a stable economy for its citizens. Besides the fiscal policy, monetary policy is a core approach utilized to regulate the money supply in the economy. In an economic perspective, increased money supply strengthens the consumers ‘purchasing power prompting them to continue borrowing with an urge to invest. Consequently, interests rate raises while the price for bonds lowers, thus causing inflation. To level, the government may intervene in central banks by increasing the bank lending rate as a strategy to reduce supply of money in the market.

Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of monetary policy tools to control one or both of these.

Low interest rates will also alter the behaviour of consumers, businesses and banks. One of which is excessive risk taking as credit is more accessible. Especially after the financial crisis when the economy is in recovery mode, individuals and institutions might take unnecessary gambles in order to recoup what they have lost. This will lead to a high credit bubble where people are unable to repay their loans. However, people might react differently. They might be more prudent with their money thus reducing the demand, which will lead to an economic decline. As human behaviour is not possible to quantify and predict accurately, this presents the government with a dilemma,

Interest rates are normally associated with inflation. Consumer spending and economic growth is encouraged as a result of low interest rates. However, inflation can occur if supply is lower than demand due to consumption increases but this is indeed not a bad outcome though foreign trade and investment will be lacklustre as opposed to the cash rate being higher which more likely attracts foreign investment and trade.

This involves buying or selling financial instruments like bonds in exchange of money to be deposited with the central bank. By selling the financial instruments, the central bank mops up the cash in circulation. On the other hand, selling injects money thus increasing the supply of money (Bernanke 2006).

A: Investment spending depends on interest rates due to opportunity cost and risk. For example, when interest rates rise, the opportunity cost of your investment also increases. When interest rates are higher investors are willing to pay less for payment in the future. Which in turn leads to a lower rate of investment. The opposite can be said for falls in interest rates that are met will lower opportunity costs.