Question

To what extent is it true that there is only one interest rate? How are actual observed interest rates determined?

Answer 1

No, there are more than one interest rate in an economy, however, the general direction of all the interest rates are governed by a single rate i.e the discount rate which is the rate at which the Fed lends to the banks. The other interest rates that prevail in the economy are T-bill rates, commercial loan rates, deposit rates, bond rates etc. All of these interest rates usually move in tandem with the discount rate. If the discount rate increases, then these interest rates also increase while if the discount rate decreases, these interest rates also fall.

The actual interest rates are usually determined by demand and supply. The interest rate at which the money demand equals the money supply is usually the interest rate. There are also some other factors that affect the interest rate. They are the riskiness of the security, time period of the security and the overall economic conditions of an economy. These are only some of the factors.