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?