Answer:
In the long run, the interest rate is primarily determined by the interaction of the supply and demand for loanable funds, which are funds available for borrowing and lending in financial markets. This market for loanable funds includes individuals, businesses, and government entities that borrow or lend money.
The supply of loanable funds comes from savings, investments, and government budget surpluses, which increase the funds available for lending in the market. The demand for loanable funds comes from borrowers such as businesses, individuals, and governments who want to invest in projects or spend more than their current income.
As the supply and demand for loanable funds interact, the equilibrium interest rate is determined, where the supply of loanable funds is equal to the demand for loanable funds. If the demand for loanable funds is high relative to the supply, the equilibrium interest rate will be higher, reflecting the increased competition for borrowing. Conversely, if the supply of loanable funds is high relative to the demand, the equilibrium interest rate will be lower.
In the long run, other factors such as inflation expectations, monetary policy, and economic growth can also affect the interest rate. However, the fundamental supply and demand for loanable funds remains the primary driver of the long-run interest rate.
Step-by-step explanation: