ABSTRACT
In the previous chapter, interest rate was discussed as a factor that influences the demand for money and the supply of money. That in fact means that interest rate is treated as an exogenous variable. In this chapter, we treat interest rate as a various indogenous to the economic system. By employing interactions of the demand and supply of money, we investigate how interest rate is determined and why interest rate fluctuates, while looking at the problem of how interest rate and total output are determined simultaneously. We will also expand our discussion to why the interest rates of different bonds are different. At the end, we look at how the marketplace reacts respectively to safe and risky investment opportunities.
