Interest Rate Determination
Completion requirements
Here, you will learn about determining interest rates and how supply and demand play a role in determining interest rates. Pay attention to the Fed's role in this determination and to the effects of the increase of money supply on interest rates. What are the determinants of interest rates?
Money Functions and Equilibrium
Key Takeaways
- Real money demand is positively related to changes in real gross domestic product (GDP) and the average interest rate.
- Real money supply is independent of the average interest rate and is assumed to be determined by the central bank.
- The intersection of the real money supply function and the real money demand function determines the equilibrium interest rate in the economy.