Which of the following is a key factor that determines the interest rate in an economy?

• A. The level of consumer preferences for goods
• B. The elasticity of demand for labor
• C. The amount of government spending on public goods
• D. The supply and demand for loanable funds

Answer: (D)

Verified step by step guidance

1. Understand that the interest rate in an economy is primarily determined by the interaction of supply and demand in the loanable funds market.
2. Recognize that the supply of loanable funds comes from savings by households and other entities willing to lend money.
3. Identify that the demand for loanable funds comes from borrowers, such as businesses and governments, who want to invest or spend.
4. Know that the equilibrium interest rate is the price that balances the quantity of loanable funds supplied and demanded.
5. Conclude that factors like consumer preferences for goods, labor demand elasticity, or government spending on public goods do not directly set the interest rate, but the supply and demand for loanable funds do.