Question

Explain 3 factors that can influence the equilibrium interest rate in the market?

Answer 1

Answer:

The equilibrium interest rate in the market refers to the rate at which the quantity of money demanded is always equal to money supplied. The federal bank can alter the equilibrium interest rate by adjusting the money supplies. Federal bank stabilizes the market by various means like increase the money supply or decrease in the money supply through their monetary policy.

Factors that can influence the equilibrium interest rate in the market:

1. ​​​ Monetary policy: The Federal bank stabilizes the demand & supply of money by making the changes in interest rate. Fed can decrease the equilibrium interest rate for increasing the money supply & Increase the equilibrium interest rate to decrease the money supply so that the demand for the supply of money can be stabilized.
2. Demand & Supply of money: If the supply of money decreases in such a situation interest will go down if other factors remain the same & vice versa. in such a scenario investors like to invest in bonds & debentures or other fixed income instruments instead of investing in equity etc. at the time of recession, the rate of interest goes down. equilibrium rate of interest affects the demand & supply of money in different ways to the market.
3. Inflation: If the rate of interest is too high, in such a situation consumption is getting low & investors reduce their consumption & try to invest in the fixed income instrument. equilibrium rate of interest results in stabilizes the demand & supply in an inflationary condition.