S1 ET DCM1107 Self

# Unit 12

Table of Contents

### May 25, 2026

## Definitions

### Interest

The payment or reward given for borrowing money or using capital for a specific period of time.

### Gross Interest

The total amount paid by the borrower to the lender for using borrowed money before deducting taxes, service charges, or other expenses.

### Net Interest

The actual or pure interest earned or paid after excluding additional charges such as risk, management costs, and inconvenience.

### Nominal Rate of Interest

The stated rate of return on a loan or investment without considering the effect of inflation.

### Real Rate of Interest

The actual rate of return after adjusting the nominal interest rate for inflation, reflecting the true purchasing power of money.

### Liquidity

The ease or availability with which cash or assets can be converted into ready money for immediate use.

## Theories of Interest

Theory of Interest | Economist(s) | Short Summary
--- | --- | ---
Abstinence Theory of Interest | Nassau William Senior | Interest is the reward paid to people who abstain from present consumption and save money for productive use.
Bohm-Bawerk’s (Agio) Theory of Interest | Eugen von Böhm-Bawerk (developed from John Rae’s ideas) | Interest arises because people value present goods more highly than future goods; therefore, compensation is needed for postponing consumption.
Fisher’s Time Preference Theory | Irving Fisher | Interest is the “price of time,” determined by people’s preference for present consumption over future consumption and investment opportunities.
Loanable Funds Theory | Knut Wicksell, Bertil Ohlin, Dennis Robertson | Interest is determined by the demand and supply of loanable funds, including savings, investment, bank credit, and hoarding.
Liquidity Preference Theory | John Maynard Keynes | Interest is the reward for parting with liquidity; it is determined by the demand for and supply of money.