If X is in this position, then the M line simply runs through o, and "rotates" about
that fulcrum as the interest rate changes. Equilibrium for X in this event might be
illustrated in figure 1 by a movement up Mil to Q". In this event the market would
not be in equilibrium, and the interest rate would have to drop below the level
indicated by M. 5. An Objective or a Subjective Theory of Interest? As indicated
above, Fisher's theory determines the equilibrium rate of interest by finding that
rate which ...
The Theory of Interest is concerned with the problem of explaining (A) why economic systems have interest rates and (B) what determines the values these interest rates assume. The purpose of this paper is to give a self-contained exposition of an approach to these questions developed mostly over the past twenty years. Making use of a simplified economy in which consumption goods are produced from labor and capital, it is shown that even in a steady state under 'normal' conditions it is necessary to have an interest rate which is strictly greater than the growth rate of the labor force if the economy is to be in equilibrium meaning that supply and demand for all goods are equal. This answers (A) above. In the final section, the author answers (B) by showing that the interest rate r gives, roughly speaking, a measure of the amount of increase in future 'consumption' obtainable for a unit sacrifice of consumption in the present. (Author).
The Theory of Interest is concerned with the problem of explaining (A) why economic systems have interest rates and (B) what determines the values these interest rates assume.
