Determinants of Interest Rates

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Determinants of Interest Rates

Lecture number:
Lecture Note
University of Texas at Austin
Fin 320f - Foundations of Finance

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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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