Introduction to risk, return and the historical record - Determinants of the level of interest rates
5 important questions on Introduction to risk, return and the historical record - Determinants of the level of interest rates
What are the fundamental factors that determine the level of interest rates?
The demand for funds from businesses to be used to finance investments in plant, equipment, and inventories (real assets or capital formation).
The government’s net supply of or demand for funds as modified by actions of the Federal Reserve Bank.
Why is real rate of return always risky?
Because future inflation is risky, the real rate of return is risky even when the nominal rate is risk-free.
Why does the supply curve slopes up from left to right?
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Why does the demand curve slopes down from left to right?
This is because the lower the real interest rate, the more businesses will want to invest in physical capital. Assuming that businesses rank projects by the expected real return on invested capital, firms will undertake more projects the lower the real interest rate on the funds needed to finance those projects.
What does the Irving Fisher (1930) equation mean?
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