What role do interest rates play in allocating capital to different potential borrowers? What happens to market-clearing, or equilibrium, interest rates in a capital market when the demand for funds declines? What happens when expected inflation increases or decreases?

Capital market

What role do interest rates play in allocating capital to different potential borrowers?

What happens to market-clearing, or equilibrium, interest rates in a capital market when the demand for funds declines? What happens when expected inflation increases or decreases?

How does the price of capital tend to change during a boom or a recession?

How does risk affect interest rates?

If inflation during the last 12 months was 2 percent and the interest rate during that period was 5 percent, what was the real rate of interest? If inflation is expected to average 4 percent during the next year and the real rate is 3 percent, what should the current rate of interest be?