When would an increase in the money supply immediately increase the interest rate?

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mkoren | Middle School Teacher | (Level 3) Senior Educator

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An increase in the money supply could eventually lead to an increase in interest rates. When the money supplies increases, people have more money to spend or invest. As more money is invested, this can increase the number of jobs available. With more people working, people will be making more money. Most likely, they will spend it on goods and services. When the demand for goods and services increases, prices will rise if the supply of those goods and services stays the same. This will cause inflation. To slow down the economy, the Federal Reserve Board will increase interest rates. This means fewer people will borrow money to buy items or to invest in businesses. If there is less investment in businesses or the economy, fewer jobs will be created. If people have less money, or if it is more expensive to borrow money, people will demand fewer products. This will bring prices down and lower inflation. When the economy becomes too active, interest rates usually rise to slow the growth to some degree.

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