<p>How does an increase in money supply, due to a decrease in the REPO rate, decrease the nominal interest rate?</p>
<p>If an increase in money supply means more inflation, how doesn't inflation lead to inflation in the price of money market?</p>
<p>Meaning: Higher inflation =&gt; higher interest rates since both relate to prices.</p>
<p>Thanks.</p>

CC BY-SA 4.0
2022-09-12T15:22:19.447Z
I think you may be confusing a few basic concepts. There is no single nominal interest rate. Speaking of the US, the rate directly affected by policy is the fed funds rate, where repo and reverse repo act as "cap" and "floor" for the fed funds market (and overnight dollar markets). It's the FEDs decision to set these rates, not money supply that affects it. Rather money supply (specifically short term supplies of reserves) adjust (temporarily) accordingly https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements
Alex
CC BY-SA 4.0
2022-09-13T07:18:41.610Z
Hi, thanks for the answer. I was talking about nominal IRs in general.
okman
CC BY-SA 4.0
2022-09-13T07:19:41.400Z
If there is no single nominal interest rate, which one does the inflation affect?
okman
CC BY-SA 4.0
2022-09-14T06:09:27.907Z
No interest rate is directly affected by inflation. The longer the tenor the more impact inflation expectations will have on demand and supply, hence the interest rate. In general, every quoted interest rate in the economy is nominal. Feed funds, bonds, mortgages, deposits, savings accounts, credit cards, lease rates etc. In terms of bonds, increased demand for bonds increases bond prices which decreases interest rates.
Alex
CC BY-SA 4.0
2022-09-14T06:14:15.897Z
Also the link between overall money supply and interest rates is so [weak](https://www.federalreserve.gov/faqs/money_12845.htm)
  that  many central banks, including the FED, essentially do not look at money supply anymore when conducting monetary policy. [This answer](https://economics.stackexchange.com/a/52278/40033) shows that in general interest rates decline across the spectrum if a central bank reduces rates, not the opposite
Alex
<macroeconomics><finance><money-supply><financial-economics>
Question about money supply and the nominal interest rate
okman
# Question about money supply and the nominal interest rate

(Asked by: username_0 on 2022-09-12)

How does an increase in money supply, due to a decrease in the REPO rate, decrease the nominal interest rate?

If an increase in money supply means more inflation, how doesn't inflation lead to inflation in the price of money market?

Meaning: Higher inflation => higher interest rates since both relate to prices.

Thanks.

**Tags:** macroeconomics, finance, money-supply, financial-economics

> **Comments:**
> **username_1**: I think you may be confusing a few basic concepts. There is no single nominal interest rate. Speaking of the US, the rate directly affected by policy is the fed funds rate, where repo and reverse repo act as "cap" and "floor" for the fed funds market (and overnight dollar markets). It's the FEDs decision to set these rates, not money supply that affects it. Rather money supply (specifically short term supplies of reserves) adjust (temporarily) accordingly https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements  
> **username_0**: Hi, thanks for the answer. I was talking about nominal IRs in general.  
> **username_0**: If there is no single nominal interest rate, which one does the inflation affect?  
> **username_1**: No interest rate is directly affected by inflation. The longer the tenor the more impact inflation expectations will have on demand and supply, hence the interest rate. In general, every quoted interest rate in the economy is nominal. Feed funds, bonds, mortgages, deposits, savings accounts, credit cards, lease rates etc. In terms of bonds, increased demand for bonds increases bond prices which decreases interest rates.  
> **username_1**: Also the link between overall money supply and interest rates is so [weak](https://www.federalreserve.gov/faqs/money_12845.htm)   that  many central banks, including the FED, essentially do not look at money supply anymore when conducting monetary policy. [This answer](https://economics.stackexchange.com/a/52278/40033) shows that in general interest rates decline across the spectrum if a central bank reduces rates, not the opposite  

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