Eli5: How do changes in the money supply affect inflation and interest rates in an economy?”
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The usual economics answer here is to think about money like it’s any other good. There’s demand for money, there’s supply of money, and there’s a “price of money” in the form of how it trades for other goods or in terms of how hard it is to borrow now.
Interest rates and inflation are both measures, in some sense, of the price of money (higher inflation, lower interest rates = lower price of money) relative to other goods. And as with almost all goods, increases in the supply of money reduce the price of money. So in general, high money supply causes high inflation and low interest rates, and low money supply causes low inflation (or deflaration) and high interest rates.
This being an econ-101 question, though, there are numerous exceptions and assumptions built in here that don’t always apply to a real economy.
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