Why does increasing the money supply decrease the interest rate in layman's terms? If money supply increases, then I will have more money in my pocket to spend more. I imagine that prices will also increase over time to adjust to there being more money in circulation. Is it because that now, fewer people want to save because they have so much money to spend that the interest rate in general decreases when the money supply increases? Can someone explain it to me from an average Joe perspective, as in how does the increase of the money supply affects me personally and why the interest rate would decrease?
On most fundamental level it is because interest rate is price for money. In the same way as price of milk goes down when supply of milk increases (ceteris paribus) price of money goes down when supply of money increases. For example, consider the following diagram from Blanchard et al. Macroeconomics below. You have supply of money (by central bank) and then you have demand for money by people. Interest rate ensures that demand for money = supply of money. If supply increases (shift to the right) interest rate has to decrease otherwise people would not be willing to get and hold that additional money.