Question : Rate of interest is determined by
Option 1: The rate of return on the capital invested
Option 2: Central Government
Option 3: Liquidity preference
Option 4: Commercial Banks
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Correct Answer: Liquidity preference
Solution : Correct Answer is Liquidity preference
In a free market where supply and demand are in flux, interest rates are set. The amount of money available depends on how willing consumers, businesses, and governments are to save. Some of these interest rates in India are regulated by the government. According to Keynes's liquidity-preference theory of interest, the amount of money in circulation and the preference for liquidity determine the interest rate.
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