The reserve bank sets the cash rate for the market based on the macroeconomic principles. Financial institutions prefer to set their own equilibrium interest rate based on the conditions of the market.

1. Explain the key features of the theory which determines the interest rate based on the demand and supply of fund in the market.

2. Draw graphs with appropriate labelling for the theory that you have identified to answer part (i).

3. Explain the factors which causes the equilibrium interest rate to change.

Answer rating: 100% (QA)

Solution 1 KEY FEATURES In the US the money supply is influenced by supply and demandand the actions of the Federal Reserve and commercial banks The Federal Reserve sets interest rates which determine what banks charge each other to borrow money what the Fed charges banks to borrow money and what the consumer has to pay to borrow money Setting interest rates involves assessing the strength of the economy inflation unemployment and supply and demand ... View the full answer