Question

The rate of interest is a price:
a. Of what is it the price? (1 mark)
b. What determines this price? (Sketch a relevant graph of the money market). (2 marks)
c. What factors influence the demand for money? (2 marks)
d. What factors influence the supply of money? (2 marks)

Answer 1

a.This is the price for lending money

b. Interest rates are determined by three forces: Federal Reserve, which sets the fed funds rate; investor demand for Treasury notes and bonds; the banking industry, that offer loans and mortgages 

c. price level, intensity of commodity-money circulation, propensity to save, demand for goods and services

d. refinancing rate, required bank reserves rate, money demand, population behavior - people prefer to take loans or deposits