In the long run, the real interest rate is determined by
A)the exchange rate.
B)the amount of government spending only.
C)the balance between the demand for C, I, and X and the available supply of goods in the economy.
D)the rate of inflation.
E)a political process.

Question

Quizplus · Accepted Answer

The real interest rate is determined by the balance between the demand for consumption (C), investment (I), and exports (X) and the available supply of goods in the economy. When demand for these goods increases relative to the supply, prices tend to rise, which leads to higher interest rates. Conversely, when the supply of goods is higher than demand, prices tend to fall, which leads to lower interest rates. This means that the real interest rate is not determined by any one factor, such as the exchange rate or government spending, but rather by the overall state of the economy.

In the Long Run, the Real Interest Rate Is Determined