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What is the effect of increase of money supply on the interest rate?

      

What is the effect of increase of money supply on the interest rate?

  

Answers


Dana
Increase in money demand supply leads to decrease in interest rate. Expansion of the money supply will lead to the interest rate falling. This will increase investment. Depending on the interest elasticity of the investment function and the value of the investment multiplier, therefore, expansionary monetary policy can help reduce unemployment and expand output in the economy. At some point an increase in money supply will be ineffective in bringing a fall in the interest rate. This is because the liquidity trap exists and therefore any increase in income beyond this point goes to satisfy the demand to idle speculation balances

Dana05 answered the question on August 14, 2019 at 07:26


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