The article illustrates the concepts of macroeconomics whereby money supply is increased through initiation of easy monetary policy. When the government purchases Treasury bonds through its open market operations it increases the money supply. Money supply is inversely proportional to the interest rates. Therefore, an increase in money supply puts a downward pressure on interest rates and interest rates decrease. As shown in Graph 1 the increased supply of money from Sm1 to Sm2 decreases the interest rate from 10 percent to 8percent; provided that Demand of money is held constant.
Illustrated further, if money supply was to be further increased from Sm2 to Sm3 and demand for money is held constant the interest rates further decreases from 8 percent to 6 percent. A decrease in interest rates makes credit facilities more attractive and encourages consumer and investment loans. In the theoretical framework of macroeconomics a decrease in interest rates will bring about an increase in the demand for investment and consumer loans. The effect of decrease in interest rate on consumer loans demand is illustrated in Graph 2. Wherein, a decrease in interest rate from 10 percent to 8 percent switches the demand for consumption loans along the x-axis to a higher figure from C1 to C2. Likewise a further decrease in interest rate from 8 percent to 6 percent further increases the demand for consumer loans from C2 to C3. Demand for consumption loans is inversely proportional to the interest rates charged. Similarly, the effect of decrease in interest rate on investment loans demand is illustrated in Graph 3. Wherein, a decrease in interest rate from 10 percent to 8 percent increases the demand for investment loans from I1 to a higher demand of I2. Similarly, a further decrease in interest rates from 8 percent to 6 percent brings switches the demand to the right along the x-axis to I3, which is an even higher figure than I2. As described in the article the Federal Reserve is following the same rationale towards saving the economy from a deep depression through money creation in the economy by these measures.
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