What is the relationship between money supply and interest rate?

(1) interest rate determination theory.

(1) Classical real interest rate theory: it is believed that interest rate is determined by practical factors such as investment and savings, and investment is the demand for funds, which decreases with the increase of interest rate; Savings is the supply of funds, which increases with the increase of interest rate. When the capital demand equals the capital supply, the equilibrium price is determined.

② liquidity preference interest rate theory: Keynes's interest rate determination theory from the perspective of money. It is believed that money demand mainly includes transactional demand, preventive demand and speculative demand. Money supply is an exogenous variable, which is mainly determined by monetary policy. The demand for funds is equal to the price when the funds are supplied.

③ loanable funds Theory: Considering both the product market and the money market, it is considered that the demand and supply of loan funds include two aspects. The demand for loan funds comes from the investment flow and monetary balance that people want to hold in a certain period of time; The supply of loan funds comes from the change of savings flow and money supply in the same period. Among them, money supply is positively correlated with interest rate, and money demand is negatively correlated with interest rate. Generally speaking, the equilibrium condition is: I+△ MD = S+△ Ms, so the supply and demand in loanable funds determine the equilibrium interest rate.

①IS-LM theory: The equilibrium interest rate is determined by income and interest rate. (See short answer 1)

(2) The relationship between monetary growth and interest rate level.

(1) In the short term, the increase of money supply will lead to an oversupply of funds in the money market, so the interest rate as the price of funds will inevitably fall, thus stimulating investment and consumption.

(2) In the long run, the increase of money supply will stimulate investment and consumption, thus increasing economic growth and total demand, and the demand for money in economy and society will also increase accordingly, leading to an increase in interest rates; At the same time, the rise of the price level will also push up the nominal interest rate. However, according to the "currency neutrality" of monetarism, the increase of money supply can only change the nominal interest rate in the long run, while the real interest rate remains unchanged.

Good question! I can see that it is a brain. Let me say that, on the whole, the red line is correct, and the yellow line is not particularly accurate.

The central bank is indeed the source and supplier of money, which affects the market interest rate through supply. The yellow line indicates that the central bank adjusts interest rates. Do you know how the central bank adjusts interest rates? The central bank regulates interest rates by buying and selling government bonds in the open market, that is, it affects interest rates through the money supply.

For example, if the central bank wants to cut interest rates, it will use the money to buy short-term government bonds in the market, and the government bonds will be returned. The central bank will release money, and there will be an oversupply of money in the market. (It is difficult for demand to change instantly in the short term, but money supply can change instantly. ) interest rates will fall until they reach the level that the central bank hopes to achieve, or within a certain range, the central bank will stop buying government bonds. If it can't do this, it will continue to buy US Treasury bonds. This is the process of the central bank "cutting interest rates". On the contrary, the process of raising interest rates is to issue government bonds to withdraw money.

Most people just say that the central bank will cut interest rates or raise interest rates. In fact, behind the scenes, the central bank achieves the purpose of raising interest rates or lowering interest rates by adjusting the tap of money supply. So generally speaking, it is the money supply that affects the interest rate level, and the central bank also controls the interest rate through the money supply.

The exception is the liquidity trap. When interest rates are already low, the central bank will release more money. Because the demand is far less than the supply, the interest rate decline is not obvious, or even not at all. At this time, the central bank's monetary policy is almost effective. Therefore, when the market interest rate is very low, if you want to cut interest rates again, monetary policy will not work well. But this situation obviously does not belong to the scope of topic discussion.

The above is for reference.

Extended data

The monetarist school believes that interest rates are time-delayed and cannot reflect the economic situation in time, and the reflection of interest rates on money supply is not negatively correlated as Keynes thought. In the short term, the increase of money supply will reduce interest rates, but in the long term, with the increase of investment and demand, the demand for money will increase, and the interest rate of money will rise again.

Brief introduction of monetary school

Monetarism is a school of economics, also known as monetarism, which appeared in the United States in the 1950s and 1960s. Its founder is Friedman, a professor at the University of Chicago. In theory and policy proposition, the monetary school emphasizes that the change of money supply is the fundamental and dominant reason that causes the change of economic activities and price level.

The main (though not the only) reason for the change of nominal national income lies in the change of money supply determined by the monetary authorities. If the change of money supply will cause the change of money circulation speed in the opposite direction, then the influence of the change of money supply on prices and output will be uncertain and unpredictable. Friedman emphasized that the money demand function is a stable function, and he tried to minimize the possibility of the change of money circulation speed and its possible impact on output and price, thus establishing a definite causal relationship between money supply and theoretically predictable nominal national income.

In the short term, the change of money supply mainly affects output and partly affects price, but in the long term, output is completely determined by non-monetary factors (such as the quantity of labor and capital, resources and technical conditions, etc.). ), and the money supply only determines the price level.

The capitalist economic system is essentially stable. As long as the market mechanism is brought into full play to regulate the economy, capitalism will develop steadily at an acceptable level of unemployment. Keynesian fiscal and monetary policies that regulate the economy have not reduced economic instability, but strengthened it. Therefore, Friedman strongly opposed state intervention in the economy and advocated a "single rule" monetary policy. This is to take the money stock as the only policy tool, and the government will publicly announce a long-term fixed money growth rate. This growth rate (such as 3-5% per year) should be consistent with the expected long-term average growth rate of real national income under the condition of ensuring the stability of price level.