<p>Reason 1 first and then reason 2.</p>
<p>Actually, central bank first decides a target interest rate and then moves the money through OMOs.</p>

CC BY-SA 4.0
2022-07-29T17:40:50.113Z
Thanks for answering. So it's like this? Say, initial int rate = 10. CB wants to target i = 5. With omo, say it comes down to 8 and by by public further down to 5. Am I correct?
Rakesh Poddar
CC BY-SA 4.0
2022-08-05T17:43:55.453Z
yes, it works like this only
stats_geek
CC BY-SA 4.0
2022-08-07T08:12:19.123Z
Thanks a lot. Finally I am clear now after many days.
Rakesh Poddar
CC BY-SA 4.0
2022-07-28T14:28:10.940Z
2022-07-28T14:28:10.940Z
stats_geek
<p>I understand the fact the Increase in Money Supply reduces the interest rate in Money Market.</p>
<p><strong>But these two explanations are confusing me a lot. I'm not able to understand which is correct.</strong></p>
<p><strong>Reason 1</strong></p>
<blockquote>
<p><strong>Let's Say Central Bank Increase Money Supply using Open Market Operation.</strong> So, it will buy bonds &gt; Bond Demand Up &gt; Bond Price Up &gt; Bond Interest Down &gt; Money Demand Up till Ms = Md</p>
</blockquote>
<p><strong>Reason 2</strong></p>
<blockquote>
<p><strong>Due to Increased Money Supply, People are holding more Money they wish in their Pockets.</strong> They will use that extra money to Buy Bonds and then the same chain effects as above will follow.</p>
</blockquote>
<p>Both the explanations are correct, as far as I think. <strong>But which one is ultimately on work?</strong>
Or are both working (2nd after 1st)?</p>
<p>Please help me in understanding. Thanks in Advace.</p>

<macroeconomics><interest-rate><money-supply><bonds><keynesian-economics>
Why Increase in Money Supply Reduces Interest Rate in Money Market?
Rakesh Poddar
# Why Increase in Money Supply Reduces Interest Rate in Money Market?

(Asked by: username_0 on 2022-07-25)

I understand the fact the Increase in Money Supply reduces the interest rate in Money Market.

**But these two explanations are confusing me a lot. I'm not able to understand which is correct.**

**Reason 1**

> **Let's Say Central Bank Increase Money Supply using Open Market Operation.** So, it will buy bonds > Bond Demand Up > Bond Price Up > Bond Interest Down > Money Demand Up till Ms = Md

**Reason 2**

> **Due to Increased Money Supply, People are holding more Money they wish in their Pockets.** They will use that extra money to Buy Bonds and then the same chain effects as above will follow.

Both the explanations are correct, as far as I think. **But which one is ultimately on work?**
Or are both working (2nd after 1st)?

Please help me in understanding. Thanks in Advace.

**Tags:** macroeconomics, interest-rate, money-supply, bonds, keynesian-economics


---

## 1 answers

### Answer by username_1 on 2022-07-28. Score: 1 | Accepted answer

Reason 1 first and then reason 2.

Actually, central bank first decides a target interest rate and then moves the money through OMOs.

> **Comments:**
> **username_0**: Thanks for answering. So it's like this? Say, initial int rate = 10. CB wants to target i = 5. With omo, say it comes down to 8 and by by public further down to 5. Am I correct?  
> **username_1**: yes, it works like this only  
> **username_0**: Thanks a lot. Finally I am clear now after many days.  

---

