When the economy is overheated and inflation rises, the demand for money will be greater than the supply of money. At this time, interest rates will rise and credit will tighten.
1. In terms of deposits, the money supply has increased, the liquidity has increased, and more money has been used for savings. The cost pressure on banks to lend money to depositors is reduced, so the interest rate is reduced. On the contrary, the money supply has decreased, and the money used for saving has also decreased accordingly. The pressure on banks to borrow money has increased, which will raise interest rates.
Second, in terms of investment, if the money supply is increased, the liquidity is increased, and the cost of borrowing money from banks is reduced, the loan interest rate will be reduced. On the other hand, if the money supply is less, the cost for banks to absorb deposits will increase and the interest rate will increase accordingly.
Meaning function
In terms of expression, interest rate refers to the ratio of interest amount to total loan capital in a certain period. Interest rate is the interest level of unit currency in unit time, indicating the amount of interest. Economists have been trying to find a set of theories that can fully explain the structure and changes of interest rates. Interest rates are usually controlled by the national central bank and managed by the US Federal Reserve. So far, all countries regard interest rate as one of the important tools of macro-control. When the economy is overheated and inflation rises, it will raise interest rates and tighten credit; When the economy is overheated and inflation is controlled, interest rates will be lowered appropriately. Therefore, interest rate is one of the important basic economic factors. Interest rate is an important financial variable in economics, and almost all financial phenomena and financial assets are related to interest rate to some extent.
Similarly, when the market demand for money increases, the market interest rate will also increase to attract more social funds. The above assumption is due to the automatic adjustment mechanism, and the market demand and price reach a new equilibrium. The increase of money demand will lead to the increase of market interest rate, and the increase of market interest rate will increase the market money supply. After the money supply increases to a certain extent, the money supply will exceed the demand, which will lead to the decline of market interest rate, and finally reach the balance between market capital supply and demand and market interest rate again. Take China's housing loan interest rate as an example. Theoretically, if the balance point between money supply and demand and loan interest rate in China is the benchmark interest rate, then if the housing loan interest rate exceeds the benchmark interest rate, that is, the bank's loan interest rate rises, people's willingness to buy a house will decline, and the loan demand will decline. When the loan interest rate began to fall on the basis of the benchmark interest rate, people's enthusiasm for buying houses increased and the demand for housing loans increased. This is basically the truth.