THEORIES OF INTEREST PART 1
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Free sample — 8 of 66 rapid-fire Q&A cards.
What is the classical theory of interest?
The classical theory holds that interest is determined by the supply of savings and the demand for investment, where the rate adjusts to equate the two in a free market.
What is the neo-classical theory of interest?
Interest is price paid for use of capital, equilibrating saving and investment.
According to the classical economists, what is interest a reward for?
Classical economists viewed interest as a reward for 'waiting' or 'abstinence' — forgoing present consumption to make funds available for productive investment.
What does the 'roundabout production' concept in Böhm-Bawerk's theory refer to?
Using capital-intensive indirect methods to increase future output and productivity.
Who is associated with the abstinence theory of interest?
Nassau Senior is primarily associated with the abstinence theory, which argues that interest compensates savers for deferring present consumption.
What is the 'waiting' concept in the abstinence theory of interest?
Interest is reward for postponing present consumption and waiting for future returns.
What does the loanable funds theory of interest state?
The loanable funds theory states that the rate of interest is determined by the demand for and supply of loanable funds in the credit market, incorporating savings, hoarding, bank credit, and investment demand.
Who introduced the concept of 'waiting' as an alternative to 'abstinence' in interest theory?
Alfred Marshall introduced 'waiting' to replace Senior's abstinence concept.
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