what is interest (1)
TRANSCRIPT
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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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