What Are the Determinants of the Nominal Interest Rate in the Medium

question 4

Essay

What are the determinants of the nominal interest rate in the medium run? Based on your answer,to what extent can monetary policy affect the nominal interest rate in the medium run? Briefly explain.And finally,to what extent can fiscal policy affect the nominal interest rate in the medium run? Briefly explain.

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Definitions:

Retaining Earnings

Retained earnings refer to the portion of net income that is kept by a company rather than being paid out to its shareholders as dividends.

External Equity

Funds raised from outside investors, including public offerings, private placements, and venture capital.

Flotation Costs

The costs associated with issuing new securities, including underwriting, legal, and registration fees, which affect the net proceeds of the issued securities.

Market Risk Premium

The Market Risk Premium refers to the additional return an investor expects from holding a risky market portfolio instead of risk-free assets. It represents the compensation investors demand for taking on higher risk.