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INTERSET IS PAYMENT FOR THE USE OFMONEY OR USE OF LONABLE FUNDS

IT IS THE PRICE PAID FOR THE USE OFLONABLE FUNDS

IT CAN BE DERIVED AS INCOME DERIVEDFROM LENDING FUNDS

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GROSS INTEREST

NET INTEREST

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. Interst arise bcz of real factors as productivity,thrift, abstinence etc

.intrest regardd as real phenomenan

.rate of interst is determined by supply anddemand of capital

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Supply of capital

Demand of capital

Determination of rate of Interest Criticism

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Supply of capital depends on savings

Influnced by factors such asabsentisem,waiting,time preference

Factors depend on rate of intrest

s=f(r)

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To get capital goods

Marginal productivity ( depends)

Why less demand of capital?

Demand curve

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Demand and supply of capital are equal

Determination of roi

RATE OF

INTREST

DEMAND FOR

CAPITAL SUPPLY OF

CAPITAL

SAVINGS

1% 80

40

2% 70

50

3% 60 60

4% 50 70

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EQUILIBRIUM BTWN SAVINGS ANDINVESTMNT

EFFECT OF INTERST

BASED ON REAL FACTORS

NARROW CONCEPT

IGNORES BORROWING

INTERST NOT A REWARD OF SAVINGSONLY

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Interest is the price which equates demand andsupply of loanable funds

Determination by demand n supply of loanable

funds

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Savings

Bank credit

Dishoarding

Disinvestment

Supply of Loanable funds = S+B+DH+DI

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Demand by house hold

Consumption

Investment

Demand by Govt sector

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Investment Demand

Consumption

Hoarding

Demand for Loan able funds = I+C+H

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Demand and supply of capital are equal

Determination of roi

RATE OF

INTREST

DEMAND FOR

CAPITAL SUPPLY OF

CAPITAL

SAVINGS

1% 100

20

2% 8040

3% 60 60

4% 40 80

5% 20 100

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Interest determined at point where demandand supply for loanable funds are equal

S+B+DH+DI= I+C+H

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Equilibrium Between demand & supply of loanable funds

Unrealistic assumptions

Government Interference

Ignore effect of Investment on Income

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Developed by John Maynard Keynes

determination of the interest rate bythe supply and demand for money

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the transactions motive: Lt=f(Y)

the precautionary motive Lp=f(Y)

Speculative motive Ls =f(r)

M1=Lt+Lp=f(Y)

Ls=f(r)

MD=Lt+Lp+Ls=f(Y,r)

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Money in circulation and bank deposits

Increase in supply, lowers the rate of interest

Decrease in supply, raises the rate of interest

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Rate of interest depends on both factorsmonetartay as well as real factors

Rate of interest =LM=IS

LM equiblirium situation in monetary factors

IS equiblirium situation in real factors

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