Interest Rate Theory

Interest rate theory explores why interest rates change over time, considering factors like inflation, economic growth, and monetary policy. It suggests that interest rates reflect the balance between borrowers' desire for funds and lenders' willingness to lend, influenced by expectations of future inflation and economic conditions. Higher expected inflation often leads to higher interest rates, as lenders want compensation for losing purchasing power. Central banks and market forces jointly shape interest rates, making them a key indicator of economic health and monetary stability. Understanding these theories helps predict how interest rates might move in different economic scenarios.