when the fed buys securities in the open market it increases the suply of money, yet it also increases the demand for money. isn’t supply and demand supposed to go in opposite directions?
When the Feds drop money in the market - by buying securities, because there are more money in the market it becomes cheaper to use money (drop in interest rates), so it would increase the demand for loanable money.
Eventually thats what happens, also known as crowding-out.
Crowding-out is totally different. Crowding out is when the government expand its deficit by spending more than their means, and borrowing (to the detriment of the private sector). Since the government can afford whatever interest rate, the government increased demand for money would drive up the interest rate, making it difficult to impossible for the private sector (private investors) to borrow - hence “crowding” them out.
No, demand for money does not increase. The quantity demanded increases, but not the demand.
Thanks for correcting me
When the Fed buys securities, it exchanges $$$ for bonds. Fed ==> $$$ ==> Banks ==> $$$ ==> Economy Bonds go into the other direction. The supply of money shifts to the right but THE DEMAND FOR MONEY remains the same what goes up is THE QUANTITY DEMANDED. The latter goes as interest rates go down (the increase in supply reduces the interest rate. Nothing to do with the crowding out effect here.