This chapter discusses how interest rates are determined in financial markets. It introduces the factors that influence the demand and supply of assets like bonds. The demand for bonds depends on wealth, expected returns, risk, and liquidity. The supply of bonds depends on expected profits and government budget deficits. Equilibrium interest rates are set by the intersection of the demand and supply curves in bond and money markets. The chapter analyzes how interest rates respond to changes in inflation expectations, the business cycle, money supply, income, and prices. Over time, the liquidity effect of money supply increases may be offset by rising inflation expectations and economic growth.