Question

Briefly outline the different theories of interest rate determination

Answer 1

To explain the why of it, one theory put forward is the Productivity Theory, which says interest is paid on capital because capital is productive. The borrower can get additional income from borrowed capital and in easily afford to pay interest. But if capital were free, no interest will be paid u spite of its productivity. Hence it is scarcity rather than productivity which explains interest. Scarcity also explains interest paid for consumption purposes, whereas productivity theory fails to explain it.

Answer 2

Answer:

Answer :

• $\longmapsto$ To explain the why of it, one theory put forward is the Productivity Theory, which says interest is paid on capital because capital is productive. The borrower can get additional income from borrowed capital and in easily afford to pay interest. But if capital were free, no interest will be paid u spite of its productivity. Hence it is scarcity rather than productivity which explains interest. Scarcity also explains interest paid for consumption purposes, whereas productivity theory fails to explain it.