Examination of Interest Rates

The level of interest rates is a primary point of focus in the efforts of the Board of Governors of the Federal Reserve System to fulfill the System's mandate to, among other things, promote economic growth and preserve economic stability in the United States.1 While there is little doubt that interest rate levels contribute to significant effects in both the domestic economy and the international economic environment, both the magnitude of these effects and the economic sectors most affected are subjects of disagreement.2 Similarly, it is widely acknowledged that the Board of Governors of the Federal Reserve Board is able to influence interest rate levels.3 At dispute, however, are (1) the extent to which Federal Reserve actions influence interest rate levels throughout the economy, and (2) the character of the primary motivations for Federal Reserve actions affecting interest ratesresponses to market forces or responses to political imperatives.

1Board of Governors, Federal Reserve System, The Federal Reserve System: Purpose and Functions (Washington: Federal Reserve System, 1985), 1317.

2William F. Hixson, A Matter of Interest: Reexamining Money, Debt, and Real Economic Growth (New York: Praeger Publishers, 1991), 2125; HansWerner Sinn, "American Economic Policy and the International Debt Crisis," National Bureau of Economic Research Working Paper

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the Keynesian theory of interest and the loanable funds theory of interest are considered together, a theory of interest may be formulated which provides a means for the determination of interest rates.20 The loanable funds theory of interest provides a set of savings schedules which are related to a variety of income levels. The Keynesian theory of interest provides a family of investmentdemand schedules which are also related to a variety of income levels. Together, these two sets of schedules, which are derived through the application of two different theories of interest, may be used to derive an investmentsavings relationship, which, in turn, describes the functional relationship between the interest rate, on the one hand, and the savings and investment rates, on the other hand.21 The loanable funds theory of interest provides information about the levels of income in an economy which will be associated with differing rates of interest.22 Keynesian interest theory provides liquidity preferences associated with differing income levels. By combining these data with knowledge about the supply of money established by the monetary __________ 20Ekelund and Hebert, 468. 21Richard Cantor, "Interest Rates, Household
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Approximate Word count = 5885
Approximate Pages = 24 (250 words per page)

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