Money supply and demand impacting interest rates | Macroeconomics | Khan Academy
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Examples showing how various factors can affect interest rates
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Central branks
Hi, could you please explain why in the 2nd supply & demand scenario, you took the demand curve to the right as if it was increasing but you said that since saving is going down people are gonna borrow less money?
in the second graph, i think he meant to say people borrow more as savings are down, in the third graph government borrowed more and the demand shifts to the right. if they borrow less demand curve shifts to the left. i think he just misspoke.
@@ramprasath3346 thanks for clearing that up. that confused me as well
@@etf42 welcome buddy!
This is just more bs theory. If savings goes down, borrowing is less? If savings goes down, interest rates go up? Increasing the money supply lowers interest rates? Increasing the money supply is supposed to stimulate the economy, thereby increasing prices (called inflation). Come on. Does anyone actually know. No, bc everyone of these people talk academics from books.
@@ghosthunter152 You can plot these things on sites like tradingview, or aquire the raw data, make graphs if necessary and see for yourself ;) Or are guys on wallstreetbets more credible?
for the 2374687634827643th time, Khan Academy saved my life :)
Well why on earth is the Fed only lending the government 6 or 7 trillion? Why not 500 trillion?
what about a puchellion?
Because if it will lend 500 trillion. You will start to spend more without proportionate increase in amount of work (production in the economy), thus leading to more inflation. Those doles(in the form of more money in your hands) will make you lazy your with no increase in country's GDP. Remember, same happened in zimbambwe.
@@mr.rachetphilanthrophist601 I was joking.
Ok. The end of this video is the most important part. Finally I understood why we deal with interest rate as "the price of money". That's because if supply for demand changes, the price of this must change too, in this case, interest rate.
So, about interest rate is enough understand what affect supply and demand for money. We are specifically talking aboug big consumers of money: governments, banks, consumer's sentiment,.. ? something more?
That's what I learnt watching this video. Thank you so much! Congratulations.😆
Sal, What happens when the money supply and intrest rates go up at the same time? This is what's happening now.
if consumer savings goes down, why would the demand curve shift up?
because savings will go down only when one spends more, and more spending leads to higher demand.
For the 2nd graph, I get that the supply of money will decrease (shift left) and increase interest rates, but how would that increase in rate INCREASE demand of money? People will borrow less, yes - and so interest rates should reflect that by DECREASING (as people aren't demanding loans/money as much).
Pls halp.
+Nikolai Tinsley I believe the point is that in an economy where there are less savings, there are a smaller number of savers... and if people aren't behaving as savers, they are instead behaving as borrowers. For example, if you wanted to buy a $20,000 car but you only had $10,000 in savings, not only would you take out all of your savings, but you would also be looking to borrow a $10,000 loan on top of that.
could it also mean that consumption is increasing?
I think he meant to say people will borrow more
Gabriella DeGregorio consumption is lowered because less money borrowed, higher interest rate, low money circulation
Just to clarify. In the second curve.
People are saving less, thus supply drops. That’s clear.
However I don’t understand why as you said, when people save less, they borrow more? (And push up demand for money)
How does this work in real life?
As I think, if I save less, it means I am using more money for consumption and thus I need for borrow less?
Did you get the answer
Branks
Sooo helpful
if consumer borrowing is less, how can that bring demand up? Your second graph is a bit confusing . Can you clarify that?
thank you, that is also what I cant figure out. And all of the answers feel needlessly complicated
Hi, i think he is saying that less people are borrowing DUE to high interest rates. AD= C+I+G+X-M, therefore if less people are SAVING, this means less money is in the bank for people to borrow--> interest rates increase which decreases investment (I). As Investment falls (I) this results in AD to fall, BUT (i think) due to savings falling people are SPENDING MORE, therefore the increase in consumption is greater than the fall in investment.
Again I "think" that's what he means? hope that helps
Saving up currency in circulation drop or the money supply drop at some point. As savings go up the demand of borrowing goes down the willing lenders has gone the banks
I think he said it the other way round
@@gabrielladegregorio9961 it's the other way round. High interest rate is due to the less money availiable to borrow. First money supply decreased then Interest rate increased. See 5:03 - 5:10
@KaninoWorldIsThis When consumers save less, it's usually for the intention of using that would-have-been-saved money to buy goods. Or, instead of saving money, they decide to spend it on consumer goods, shifting the demand curve outwards
thanks. it was really helpful (:
whats a central brank? jk. thanks for the vid. it helped ;)
amazing video thanks
why didn't you use the usual vertical curve for the money supply?
Its common in economics to use the vertical Axis for the price (In this case Interest Rate, which ist basically the Price for Money) and the horizontal axis to show the Quantity of Goods or services ( in that case it's money supplied). Hope i could help.
Not the axes. I believe she was talking about how it is common in econ the represent the money supply curve on the graph as vertical for the money market in the US. This, opposed to the loanable funds market which is being shown in this video.
I thought the same, in fact for making the IS-LM we usually make it vertical
@baydood510 yes to an extent. they would be forced to raise the interest rate if inflation increases
macro at its best. nice ass video.
Consumer savings goes less when there is inflation. In such case well to do consumers will save less while those on the borderline will have to borrow now to meet their needs. So we will have an aggregate effect of middle class saving less and poor borrowing more... HTH
I'm not sure but I think that if consumers save less then they'll have a higher disposable income. This means they wouldn't need to borrow as much to buy things but would increase demand. I think this would only work short term though.
Yes.
Thanks!
you say if the supply of money goes up then the nominal interest rate goes down. However the quantity theory of money says if supply of money goes up then the Price level goes up meaning inflation rises and nominal interest rate goes up as well (fisher effect). So two different behaviors of interest rate here; Can you pleaaase explain to me
Brilliant. Bravo. Bravisimo
Isn’t the money supply line vertical?
Thank you Khan's academy
Nice explanation!!
So if the interest and money supply is fixed what does an increase in government expenditure by selling bonds to the public do?
Could you please explain if govt. wants to increase aggregate demand without increasing interest rates then what should they do?
Sure, until you introduce a cost to borrowing. If you don't want to do that, then there is less incentive to lend, and less growth. The trade-off is simple...
That's where you're wrong. If an economy is burdened with national debt and compounded interest, taxes are going to exponentially increase, leaving less spending money for the taxpayer. If you want to keep interest payments low, the debt has to be low, ie you need to increase productivity and trade and increase your real GDP. But you're going to constantly be borrowing more money (with interest) to keep up with the demand for it; see the problem?
Why is money supply not perfectly inelastic?
do your own homework!
Why should it be. It is stupid question. It depends on demand ofcourse. If it would be perfectly inelastic no bank in the world would bother to change their interest rates.
Q axis; wouldn't that be $ 'available' to lend?
I understand where you're coming from, but I don't think you're quite getting what PresAndrewJackson is saying. He's simply stating from a macro level, if the only money entering the system is debt-based (ie interest bearing), assuming there is no foreign trade, any money in circulation is simply the principal of a loan. So how do you pay interest? That's the problem with the federal reserve system. What PAJ is calling for is debt-free, government printed money, not debt free banking.
Thanks 😊👍
I thought the fed artificially controls the interest rate, regardless of market conditions.
Best explanation thus far 🙌🏽
i think "less" should have been "more".. they save less cos they need to spend it, and MORE borrowing could help with that
Thank you very much, explains really clearly!
RENTING MONEY I love it!!!!!
Is the interest rate here real interest rate or nominal interest rate?
Nominal, it is not accounting Inflation
This is amazing. Awesome.
@swedishorient Greed ??
JazakAllah
is there anything this guy doesn't know??
He knows everything at surfacial level. Jack of all trades master of few.
Very helpful! Thank you!
Nice !
Amen !
Central Branks?-lmao jk great vid