Explain how the increase in the supply of money affects the real and nominal interest rate

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Business

Eduardo Rice

28 June, 05:13

Explain how the increase in the supply of money affects the real and nominal interest rate

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Viola · Answer 1

Increase in money supply indicates more money in the system which means higher liquidity. Therefore, increase in money supply means lower inflation because of the surplus cash available. Because of low inflation the central bank of the country will reduce the interest rates. Hence the nominal interest rate will decrease. Therefore increase in money supply leads to lower inflation and lower interest rates.