Money supply and demand impacting interest rates | Macroeconomics | Khan Academy

Examples showing how various factors can affect interest rates

Macroeconomics on Khan Academy: Topics covered in a traditional college level introductory macroeconomics course

About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content.

For free. For everyone. Forever. #YouCanLearnAnything

[oliveiraphael]

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.😆

[gorillaofjohn]

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?

[ITogoPogoB]

@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

[simonvellin]

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?

[Financeloverleo]

@baydood510 yes to an extent. they would be forced to raise the interest rate if inflation increases

[KaninoWorldIsThis]

if consumer savings goes down, why would the demand curve shift up?

[aceyboy]

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.

[eggjm]

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.

[StudentKats]

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

[fernandokleinrocha]

for the 2374687634827643th time, Khan Academy saved my life :)

[quinnhk]

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...

[chucka]

Sal, What happens when the money supply and intrest rates go up at the same time? This is what's happening now.

[jewishunited]

Thank you very much, explains really clearly!

[tareek]

i think "less" should have been "more".. they save less cos they need to spend it, and MORE borrowing could help with that

[nihalmelodies]

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

[bidishabezbaruah]

Could you please explain if govt. wants to increase aggregate demand without increasing interest rates then what should they do?

[medicineherbal]

if consumer borrowing is less, how can that bring demand up? Your second graph is a bit confusing . Can you clarify that?

[brendannadnerb]

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.

[rojamillerover]

So if the interest and money supply is fixed what does an increase in government expenditure by selling bonds to the public do?

[camilleanneDT]

why didn't you use the usual vertical curve for the money supply?