Chapter Three: How Do Interest Rates Affect Money Supply

Published: July 2, 2019

When interest rates are low, people are more likely to hold on to money. When interest rates rise, the cost of holding money rises and so individuals are more likely to invest in assets that pay interest. As the central bank, the Federal Reserve controls monetary policy primarily by influencing interest rates.

Video Recorded: August 20, 2018

Discussion Questions

1. What makes monetary policy important?
2. How does monetary policy relate to politics?
3. What are the cost and benefits to society of central bank independence? 

Additional Readings

• Read “Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras” by John Taylor. Available here.
• Read “The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong” by John Taylor. Available here.