S1 ET DCM1107 Self

Unit 12

Table of Contents

Definitions #

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

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

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

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

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

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

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.