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Major Economic Factors That Influence Interest Rate in United States

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Submitted By sarhin1050
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Author: Solomon Arhin Theoretical paper
TOPIC; MAJOR ECONOMIC FACTORS THAT INFLUENCE INTEREST RATE IN UNITED STATES INTRODUCTION Issues of interest rate are of major concern to every citizen in United States and often call for long debate and discussions among economists and other specialists . Generally, interest rate is defined as the rate which is charged or paid for the use of money. In other words, the cost for the use of money is called interest rate. Interest rate can be stated as real or nominal. Real rate of interest excludes inflation but nominal interest rate includes the effect of inflation. Factors influencing interest rate could be discussed differently from various field of study such as finance and accounting. However, this paper seeks to discussed, theoretically, only the major economic factors influencing interest rate in US. SCOPE There are four major factors that are found to influence the rate of interest in United States. These factors are the Federal Reserve policy, budget deficits or surplus, business level activity and international trade deficit or surplus. 1. Federal Reserve policy In United States, the Federal Reserve Board controls the money supply. The money supply has a major effect on both the level of economic activity and the inflation rate. If the Fed wants to stimulate the economy, it increases growth in the money supply. The initial effect is to cause interest rates to decline but a larger supply of money may lead to an increase in expected inflation which will push interest rate up. If the Fed eases credit, interest begins to decline but interest rate increases again if the Fed tightens credit. In 2001, for example, in order to stimulate US economy, the Fed steps to reduce interest rates. Short term rates fell and long term rates also dropped. These lower rates benefit heavily

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