Determinants of Interest Rates(2 pages)
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Determinants of Interest Rates
- Lecture number:
- Lecture Note
- University of Texas at Austin
- Fin 320f - Foundations of Finance
Unformatted text preview:
Lecture 6 Outline of Current Lecture Risk-free rate of Interest Fed monetary policy impacts Foreign trade balance Federal budget impacts Inflation impacts GDP Money supply Current Lecture The Federal Reserve’s monetary policy The foreign trade balance The federal budget balance The inflation rate The general level of economic activity Interest rates rise (inflation & GDP fall) when the Fed tightens/decreases the money supply by: Raising the reserve requirement, Raising the discount rate, or Selling Treasury securities Interest rates fall (inflation & GDP rise) when the Fed loosens/increases the money supply Foreign trade balance = Exports – Imports Federal budget balance = Receipts – Outlays Budget deficits prompt increased borrowing, causing a decrease in the money supply and upward pressure on interest rates When the federal government runs a budget deficit, it must borrow money This borrowed money becomes debt As of Feb 12, 2015, the federal debt was $18,136,906,268,079.51 (to the penny!) 2014 Gross Interest expense on federal debt was $431 billion FIN 320F
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