Interest Rate Manipulation

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The risk-free interest rate (the interest rate where the risk of direct default is close to zero) should reflect the economy-wide time preference, meaning that it should reflect the general desire to save (postpone consumption) relative to the general desire to consume. For example, a low interest rate would ideally indicate that there was a relatively high level of savings and that consumption was likely to be higher in the future than it is in the present. As such, it would act as a valid signal for businessmen to embark on long-term, capital-intensive projects in order to take advantage of both the current low cost of credit and the expected future rise in consumption.

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