How an increase in the money supply will affect aggregate demand?

Answer 1

In general, increasing the money supply will decrease interest rates. Intrest rates reflect the amount paid for the use of money. As the money supply increases, money becomes relatively less scarce and easier to obtain. As with any other good as the supply increases, while demand remains constant, the price will fall. In this case the price of money is the interest rate.

Answer 2

According to Keynesian economics, rate of interest is determined by the interaction of the demand for and supply of money. The equilibrium between these two factors will determine the interest rates. If the demand for money ( represented by Liquidity Preference ) remains constant then any decrease in money supply will force the interest rates to rise.

Reason: When money supply decreases, individual's money income will fall and with his MPC (Marginal Propensity to Consume) remaining constant, MPS (Marginal Propensity to Save) will fall. In order to induce the individual to save more, a high rate of interest will have to be offered as an attraction/incentive.

Answer 3

Individually increasing income brings about opportunity to pay off debt substantially but one must act efficiently to do so or establish loans at the lowest rate before increases incur to hedge or lock in long term savings.

Yet increasing income national wide via drops in unemployment and increasing financial gains in economic turnover means significant implications for general rising interest rates............as interest rates will move to take advantage of the revenue growth as well as national income revenues rise among consumers. The window of these changes are very closely monitored and in most part consumers only a small percentage is capable of taking such an advantage as banks, and other market revenue corporations follow this trend very closely for the slightest change to increase interest revenues.