An increase in money supply and the resulting drop in interest rates makes stocks a more attractive investment. When investors can only obtain a low level of . As the money supply increases in relation to the demand for money, then interest If demand for money increases or the supply decreases then interest rates rise . trade shares in high-end art that has consistently outperformed the S&P How Rising Global Interest Rates Impact International Stock Markets in interest rates makes money cheaper to borrow, increases the money supply, tend to fluctuate more in relation to interest rates than short-term bonds.
Central Bank is printing more money and lending it out. What is going to happen over here? Your supply curve is going to shift to the right at any given price, at any given interest rate.
Your going to have a larger quantity of money being available. It might look something like Assuming that's the only change that happens you see its effect. Your new equilibrium price of money, the rent on money, or the interest rate on money is now lower. That's why when the Federal Reserves say I want to lower interest rates, they do so by printing money. They print that money, and they lend it out in the market.
That essentially has the effect of lowering interest rates. Let's think about another situation.
Let's say this is the Fed prints and lends money. Their lending the money by buying government bonds. When you buy a government bond, your essentially lending that money to the Federal Government.
Money supply and demand impacting interest rates (video) | Khan Academy
I've done other videos on that where we go into a little bit more detail on that. Let's think of another situation. Let's think about consumer savings go down. One interesting thing about savings, savings and investment are two opposite sides of the same coin. When you save money You have the whole financial system right over here. This is the finincial system. That money goes out and is lent to other people.
For the most part, hopefully, that money when it's lent is used to invest in someway. If consumer savings goes down that means the supply of money will be shifted to the left. At any given price and any given interest rate their be less money available. In this situation our supply curve is shifting to the left.Here’s How Rising Interest Rates Will Affect the Stock, Bond and Housing Markets
That would increase interest rates. Then you could even make an argument that if consumers savings is going down consumers are going to borrow less as well. You could argue that maybe demand would go up as well. Your demand could go up and that would make the equilibrium interest rate even even higher. Let's do another scenario. Let's say that the Federal Government in an effort to The government decides to borrow a lot more money.
The government is essentially going expand it's deficit. The government is going to borrow money. Here our supply isn't changing. I'm assuming the Central Bank isn't changing it's policies, how much it's printing. Savings rates aren't changing.
The Relationship Between Money Supply & Stock Prices | Finance - Zacks
The demand is going to go up. Government is borrowing money. The government is going to borrow more money than it was already doing. At any given price the demand for money is going to increase. We're going to shift to the right, and our new equilibrium interest rate, remember the rental price of money, is going to go up.
The whole point of this is just to show you that you really can't think about money like any other good or service. If the supply of money goes up then the price of money, which is interest rates, will go down. Let me write this down. Economists keep a close eye on money supply, because this figure determines the purchasing power and therefore potential demand for products and services.
Federal Reserve Board, often referred to as the Fed, can control money supply through a number of measures.
Money supply and demand impacting interest rates
The primary method used by the Fed involves buying and selling Treasury Bills. This results in either withdrawal or addition of money into the economy. The immediate result is a change in interest rates. When there is a lot of money around, it becomes cheaper to borrow it.
When the money supply is low, not many individuals and institutions will have funds that they can lend out. The borrowers must therefore offer higher interest rates to be able to borrow.
The Relationship Between Money Supply & Stock Prices
Interest rates are often referred to as the cost of money. Interest Rates and Stocks An increase in money supply and the resulting drop in interest rates makes stocks a more attractive investment.
When investors can only obtain a low level of return by lending money, whether to a bank or a corporation or by purchasing Treasury bills, they tend to shift more money to stocks. This is often referred to as chasing yield. But if bank deposits yield 2 percent or less, the investor will look for riskier, yet potentially more profitable alternatives, such as stocks.