Asked by Surinder Gujral on Jun 03, 2024
Verified
What is the pure rate of interest?
Pure Rate of Interest
The rate of return on a risk-free investment, theoretically excluding the effects of inflation, default risk, and other factors.
- Understand the mechanisms determining interest rates, including the loanable funds theory.
Verified Answer
ZK
Zybrea KnightJun 03, 2024
Final Answer :
The pure rate of interest is a hypothetical interest rate that is completely risk-free and not subject to market imperfections; it would only compensate investors for time preference. The pure rate of interest is best approximated by the interest rates of long-term, virtually riskless securities, such as the 20-year Treasury bonds issued by the U.S. federal government.
Learning Objectives
- Understand the mechanisms determining interest rates, including the loanable funds theory.