What is the relationship between money supply and interest rate?

Macroeconomic theory is the study of various economic factors that include information about aggregated indicators. These factors usually include government fiscal or monetary policy, which may include information on money supply and interest rate that leads the liquidity of the market. The cash supply concerns how much capital exists on the market that an individual or enterprise can use to involve in financial transactions. Interest rates are "fees" related to loans, whether consumers or between commercial banks. In most economies, the central bank or government agency is responsible for monitoring both and by the need to modify politicians.

Komerční banks play an integral role in the banking system of the economy. They are primary institutions responsible for receiving customers' deposits, providing loans to individuals and businesses, and providing other critical financial services. Commercial banks usually operate under a fractional reserve system in which central Banks determine the percentage of the reissuerva. This reserve percentage is the amount of the actual cash that the bank must have in its treasures at all times. For example, if the central bank sets a percentage of reserves at 5% and the bank has customer deposits of $ 1 million in the US (USD), the bank is obliged to maintain only $ 50,000 in its facility (0.05 x 1 000 000).

Fraction reserve banking affects money supply, as the central bank can increase the offer of money by reducing the percentage of the reserve, let's say 4%. This allows individuals and businesses to increase their financial transactions. Increasing the percentage of the reserve will have the opposite effect, eliminating the money from the economy and tightening the money supply.

For the other half of the theory of money inventory and interest rates of the central bank, it usually sets one or two different interest rates in the economy. The first is known as Target Interest Rate and Banks charge each other this rate when providing loans limitI and the central bank. Theoretically higher target interest rates mean that banks will have to pay more money for their loans, which will reduce the cash supply available to consumers.

Central banks can also affect consumer interest rates, an amount that the bank will charge for individuals and businesses for loans. If consumers have to pay more money from higher interest rates, it will reduce the money supply and create a stricter economic market. Interest rates are also common to reduce the central bank to reduce inflation in the economy.