Finance Interest Rates

Contents. Introduction. Nominal and real rates of interest. The loanable funds theory of real interest rates. Loanable funds and liquidity preference. Summary. Vocabulary.

Demand for loanable funds = net investment + net additions to liquid reserves

Supply of loanable funds = net savings + increase in the money supply.

Secondly, both real and nominal interest rates are capable of changing rapidly. The theory only provides one explanation of sharply fluctuating nominal rates of interest – the behavior of the monetary authorities; but this does not account for fluctuations in real rates, unless it is accompanied by money illusion.

what determines the average rate of interest in an economy.