Models of Determination of Interest Rates

Interest rates (IR) are considered one of the most important economic factors affecting all families, businesses and governments around the world. Parkin et al. As stated by (2005), the opportunity cost of holding money, ie the borrower's price, willingly pay for the use of the loan. On the other hand, it is also compensation for the risk of the lender's loan. (Investopedia.com, n. A. 2003) Lenders and borrowers refer to individuals, companies, financial products and governments.

In this article I will explain how to determine the interest rate of the money market. It will study the impact of lowering interest rates on the economy. The framework used is an interest rate mechanism, the increase in money supply will change the interest rate and stimulate interest-sensitive expenditure. It then highlights the factors that can limit and offset the impact of lower interest rates. Interest rates are defined by Sloman et al. (2012) The price paid as a loan. The two factors that determine interest rates are money supply and money demand. The interaction of money supply and demand in the economy reaches equilibrium level. According to Sloman et al. (2012) Money market is a short-term debt commodity market where financial institutions actively participate. Figures 1 and 2 show money market and money demand

Money demand depends on the price level and activity level in the economy. Interest rates are effectively used as money costs and interest rates are determined by money demand. When monetary demand decreases (usually due to a decline in economic activity), interest rates decline and interest rates also rise as money demand increases. In most countries, funds are provided by central banks. In the United States, the central bank is the Federal Reserve System. The Fed provides funds through various mechanisms, not only sets currency prices, but also regulates the banking system in the United States. (For related readings, see how the Federal Reserve manages money supply.)