How does inflation affect the level of interest rates?
What determines the overall level of interest rates — that is, why are rates higher at some times than at others? Interest is the price of a loan, so it is determined to a large extent by the supply of, and demand for, credit, or loanable funds. Many different parties contribute to the supply and demand for credit. • When you put money into a bank account, you are allowing the bank to lend the funds to someone else. So, through the bank, you are contributing to the supply of credit in the economy. • When you buy a U.S. Savings Bond, you are lending funds to the U.S. government. Again, you are contributing to the supply of credit. • On the other hand, when you borrow — to buy a car, for example, or by keeping a balance on a credit card account — you are contributing to the demand for credit. • Individual savers and borrowers arent the only ones contributing to the supply of, and the demand for, credit. Business firms and governments in this country, and foreign organizations, too, af
