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finance - Chapter 4 The Level of Interest Rates Definitions...

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Chapter - 4 The Level of Interest Rates
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Definitions of Interest Rental price of money Reward for postponing consumption Time value of consumption Penalty to borrowers for consuming before earning Interest rate allocates funds to alternative uses between SSU’s and DSU’s
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Determinants of Interest Rates “Real Rate of Interest” LONG TERM Classical Theory of Interest 1. Supply of Savings Function of the interest rate; positive slope High interest rate Increases the reward for postponing consumption 1. Demand for investment Function of the interest rate; negative slope Higher interest rate Discourages businesses from borrowing or investing More difficult to earn +NPV or IRR > cost of capital
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Determinants of equilibrium real rate of interest
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Determinants of Interest Rates SHORT RUN Loanable Funds Theory of Interest Includes supply and demand for money Interest rate level determined by supply and demand for loanable funds
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