Whenthe Federal Reserve adjusts thesupply of moneyin an economy, the nominalinterest ratechanges as a result.Whenthe Fedincreasesthemoney supply, there is a surplusof moneyat the prevailinginterest rate. To get players in the economy to be willing to hold the extramoney, theinterest ratemustdecrease. When the Federal Reserve decreases the money supply, there is a shortage of money at the prevailing interest rate. Therefore, the interest rate must increase to dissuade some people from holding money. Changes in the demand for money can also affect the nominal interest rate in an economy. An increase in the demand for money initially creates a shortage of money and ultimately increases the nominal interest rate. In practice, this means that interest rates increase when the dollar value of aggregate output and expenditure increases. In a growing economy, having a money supply that increases over time can have a stabilizing effect on the economy. Growth in real output (i.e., real GDP) will increase the demand for money and will increase the nominal interest rate if the money supply is held constant.

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