7 - THE RATE OF INTEREST

Abstract

This chapter discusses about the rate of interest. When a borrower takes a sum of money over a period of time it is customary for a payment to be made this payment is termed interest. The payment is necessary because capital, in common with other resources, can be put to alternative uses. The rate of interest is therefore, seen as a sensitive mechanism for regulating both the demand for and supply of loanable funds. Money is desired for speculative and transactions and precautionary reasons. The rate of interest then becomes a reward for not hoarding rather than a reward for not consuming, and it is determined by the interaction of the supply of and demand for money. The two forces demand and supply met, and together set the price for money the rate of interest. Rate of interest reflects the demand for money and the supply of money. Equilibrium in commodity, factor and money markets the rate of interest which gives equality between the demand for and supply of money will also be that rate which gives equilibrium between savings and investment.