In the short run, the interest rate is determined in which market?

• A. Commodity market
• B. Loanable funds market
• C. Money market
• D. Stock market

Answer: (B)

In the short run, the interest rate is determined in the money market. Here, the interest rate is the price of holding money. The central bank can influence the money supply, while households and firms decide how much money to hold based on income and the opportunity cost of holding money in the form of interest forgone on other assets. Money demand tends to rise with income and falls when the interest rate is higher, while money supply is set by policy. The equilibrium rate is where money demand equals money supply.

The loanable funds market, by contrast, is used to think about the long-run real interest rate—balancing saving and investment over time—rather than the short-run nominal rate. The other markets (commodity and stock) don’t set the interest rate itself; they affect prices and returns, not the rate charged for borrowing or the price of money in the short run.