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# Bank Interest Rate Determination

## Definition

The process by which banks set interest rates for loans and deposits based on market conditions, risk considerations, and operational needs. These rates affect the cost of credit and the allocation of capital throughout the economy.

## Source Chapter

Book II, Chapter 2

## Context

Smith analyses how banks determine interest rates and their effects on credit allocation and economic activity. He shows how interest rates serve as signals for capital allocation and affect the overall efficiency of the economy.

## Economic Domain

Exchange

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