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Relationship Between the Money Supply and Interest Rates

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Explain the mechanism that causes a shrinking money supply to result in a change in interest rates.

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Solution Summary

This solution explains why a decrease in the money supply causes interest rates to increase.

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Monetary Policy overview

1. The Federal Reserve policy makers use several different tools to influence the money supply and interest rates. Identify and briefly describe these tools. Include in your answer the difference between expansionary and contractionary monetary policies.

2. The link below takes you to a site that shows you various Treasure security rates from short to long-term. This is called the term structure of interest rates and when graphed it is called a yield curve. What is the relationship between short and long-term interest rates as the time to maturity of the debt increases?


http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.sht ml

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