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 aren’t the only
ones contributing to the supply of, and the demand
for, credit. Business firms and governments in this
country, and foreign organizations, too, affect the
demand for, and supply of, credit
Together, the actions of all of these participants
in the credit market determine how high or low interest
rates will be
| All other things held constant, an increase
in the demand for credit raises the price of credit,
or interest rates, and a decrease in the demand
for credit lowers interest rates.
All other things held constant, an increase in
the supply of credit lowers interest rates, and
a decrease in the supply of credit raises interest
rates. |
To see how the level of interest rates varies
over time, see: Interest
Rates 
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