Regardless of the type of loans involved, interest rate is a function of the supply and its demand for money. Short term interest rates are determined by current supply and demand factors. Long term interest rates are determined by the anticipated supply and demand relationships over the life of the interest bearing security. When funds are in short supply relative to demand, short term interest rate tan be expected to rise. When short term rates go up, long term rate cannot help the affected.
Level of interest rates has a significant impact on the nations economy. The changes on interest rates cause money shift from one financial market to another. The most important factor from business viewpoint is the ease with which long term capital projects can be financed.
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