Dhaka, March 14 -- Most people here in Bangladesh and abroad grew up learning from the media that when the central bank (CB) increases the money supply, interest rate decreases and the opposite happens when CB decreases the money supply. This has been misleading some people thinking that money supply (Ms) and interest rate (r) are inversely related. Although the outcomes of CB's action are realised as intended, the inverse relationship is indefensible and outright wrong. The correct statement is that the money supply and interest rate are positively related following the microeconomic theory of law of supply.

Another misnomer that is current among people is that the CB prints currency to change the volume of money supply in the economy. ...