Determinants of the Level of Interest Rates , ‘Investments’

Interest rates and forecasts of their future values are important inputs an investment decision.

Fundamental factors to determine the level of interest rates:
1. The supply of funds from savers, primarily households.
2. The demand for funds from businesses to be used to finance investments in plant,equipment,and inventories (real assets or capital formation).
3. The government’s net supply of or demand for funds as modified by actions of the Federal Reserve Bank.

Real and Nominal Rates of Interest
- An interest rate is a promised rate of return denominated in some unit of account over some time period. Thus, You must specify both the unit of account and the time period.
- Real rate ≈ Nominal rate - inflation rate

The Equilibrium Real Rate of Interest
- Three basic factors : supply, demand, and government actions - determine the real interest rate.