Ch 4. The Level of Interest Rates

What function do interest rates serve?

As any other price it helps allocate resources When prices are incorrect, resource allocation is inefficient.

What are some of the variables used to predict interest rates?

Changes in: Money supply ( supply goes up, rate goes down) Government expenditures (spending goes up, rate goes up) GDP (economy is better, rate goes up) Inflation (inflation goes up, rate goes up) Unemployment rate ( unemployment goes up, rate goes down) [These changes not only affect interest rates but also affect each other. Interest rates also affect these variables]

Who demands loanable funds?

Consumer credit purchases Business investment State and Local Government budget deficit Federal government budget deficit

Who supplies loanable funds?

Consumer savings Business savings State and Local government budget surplus Fed Government budget surplus Fed Reserve increase in money supply

What is the difference between real and nominal interest rates?

Nominal rate is the regularly stated interest rate. Real rate is the interest rate adjusted for inflation. Real interest rate has compensation for delayed consumption and risk.

What are interest rates?

Price for borrowing money

What relation does Fisher Equation explain?

Relation between Real and Nominal Interest rates

What are the determinants of interest rates?

Supply and Demand

Can we predict interest rates?

Yes but it is very difficult and not 100% accurate