What typically happens to the interest rate when the money supply is increased?

When the money supply is increased, there is typically more money available in the economy for individuals and businesses to borrow. This increase in the availability of funds puts downward pressure on interest rates. Essentially, when there is more money available, lenders will compete to offer loans, which can lead to lower borrowing costs for consumers and businesses. As a result, people are more likely to take out loans for investments, consumption, or other expenditures. This scenario is often represented by the liquidity preference framework, where an increase in money supply leads to lower interest rates since the quantity of money demanded does not change as rapidly as the money supply itself.

In contrast, when the money supply remains unchanged, interest rates do not experience any significant movement. An increase in interest rates typically occurs in a situation where there is a contraction or decrease in the money supply or if the demand for money rises significantly without a corresponding increase in the supply. Unpredictable fluctuations in interest rates would not generally be the result of a stable increase in money supply; they are more likely a consequence of volatility in economic activities or external shocks rather than a direct outcome of increasing the money supply.