Under the monetary policy, interest rate and money supply are:

Question

BlackTom AI · Accepted Answer

In the money market equilibrium, the interest rate is determined by the interaction of money supply and money demand, so the two are related through the money demand curve.

1. Relevant knowledge points and concepts
- Money supply (Ms) is set by the central bank (nominal Ms); real money supply is Ms/P (P = price level).
- Money demand L(i,Y) (liquidity preference) depends negatively on the interest rate i and positively on income Y.
- Equilibrium in the money market: Ms/P = L(i,Y). This determines the equilibrium interest rate for a given money supply and income.

2. Step-by-step reasoning
- Start with a functional form of money demand: L(i,Y) = kY − hi, where k and h are positive constants (k captures transactions demand per unit income; h captures interest sensitivity).
- Equate real money supply to money demand: Ms/P = kY − hi.
- Solve for the interest rate i to show the relationship explicitly.

3. Calculations and intermediate steps
Ms/P = kY − hi
Rearrange: hi = kY − Ms/P
Therefore: i = (kY − Ms/P) / h
This algebra shows that i depends on Ms/P and Y via the money demand parameters.

4. Why the correct answer is correct
The expression i = (kY − Ms/P) / h demonstrates that the interest rate and money supply are linked through money demand. For a fixed Y and parameters, an increase in Ms (holding P constant) raises Ms/P and thus reduces i; the strength of this effect depends on h (the slope of money demand). Therefore the relationship is mediated by the money demand curve rather than being directly proportional.

5. Why the other options are incorrect
- "positively related to each other": incorrect; ceteris paribus, a larger money supply tends to lower interest rates (negative relation), not positive.
- "Directly related to each other": ambiguous and misleading; they are not directly proportional—relationship depends on money demand.
- "None": incorrect because there is a clear theoretical relationship via money demand.

6. Conclusion
The interest rate and money supply are related through the money demand curve, which confirms the provided correct answer.

Under the monetary policy, interest rate and money supply are:单项选择题

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