Question

Is there only one interest rate? Why or why not? How is it set according to various theories?

Answer 1

No. A nation has many different interest rates however all of them move together in the same direction. The interest rate that most theories talk about i.e the nominal interest rate is usually the rate that central bank sets for loans between banks or between the central banks and commercial banks. The other interest rates are t-bill rate, fed funds rate. Also, corporate bonds have different interest rates while government bonds have different interest rates. This is because the interest rates depend on the risk of the security. If the security is safe, the interest rates are low while if the security is risky the interest rates are high. There are also various theories to determine what interest rate a central bank should set like the Taylor's rule.