WHO DETERMINES THE INTEREST RATE? I MEAN I KNOW BUSINESSES DETERMINE THE PRICE OF THE GOODS IT SELLS  BUT WHO MAKES THE INTEREST RATE CHANGES? WHY WHEN PEOPLE DEMAND  MORE MONEY THE INTEREST RATE RISES. BUT WHO DETERMINES THAT THE INTEREST RATE SHOULD RISE  IN THIS SITUATION?

Expert Answers

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For the most part, interest rates are determined by two things.

First, and most important, the interest rates are determined by the banks and other lending institutions.  They will charge however much interest they think they can get.  So they are the ones who are actually determining the rate.  (This is true in the United States and in other free market economies.)

The rate they set can be influenced by the Federal Reserve.  The Fed loans money to banks.  If they raise the rate they charge banks to borrow money, the banks will probably raise interest rates on the money they lend out.

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