Interest rate theories explain how interest rates are determined in the economy. One key theory is the Loanable Funds Theory, which suggests that interest rates are set by the supply and demand for loanable funds. When more people want to borrow money, interest rates rise, and when there is less demand, rates fall. Another important theory is the Liquidity Preference Theory, proposed by John Maynard Keynes. This theory posits that interest rates are influenced by the public's preference for liquidity, or the desire to hold cash. Higher demand for cash leads to higher interest rates, while lower demand results in lower rates.