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INTEREST RATES AND THE FUNCTIONING OF THE FINANCIAL SYSTEM Name Professor Institution Course Date Interest Rates and the Functioning of the Financial System 1. Factors that influence the interest rates 1.1. Monetary policy Like all other nations, in the United States the interest rates are determined by the central bank, in this case, the FED. The Federal Reserve is the economy's watchdog and interest rates are by far a key component of the economic well-being of a country. The interest rates can be controlled by the exercise of the following powers as charged by law, the power to control and change when the need arises the discounting factor, power to increase or decrease the interest and mandate all commercial institution to take up the new interest and open market operations where they sell government paper. The Federal Reserve tightens its monetary policies to ensure less economic liquidity thus increase the interest rates. And loosens the monetary policies and increase the money supply in an economy to bring down interest rates. 1.2. Economic growth When the economic growth of a country improves then there is more demand for money. This increase in demand for money causes a direct increase in the interest rates. 1.3. Inflation Inflation is the progressive increase in prices of goods and services in an economy over a long period of time. Inflation increase has the effect of raising interest rates. The interest rates rise because as the inflation increases the purchasing power of money decreases. When this happens investors try to protect their future returns by asking for higher interest rates to curb the inflation. This is also because
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