Question

What determines Interest rates in the Short Run? Explain using the Classical model, Keynesian model or Phillips curve.

Answer 1

Using the classical model the interest rate in the market is determined by the demand and supply of the funds in the market, the demand for the loanable fund is made by the investors in the market and supply of the loanable fund in the market is done by the household, government or the corporates that save the money.

the equilibrium interest rate i.e. the rate at which the demand of the loanable funds in the market and supply of the loanable fund in the market are equal is the interest rate that prevail in the market.