Theory of Determination of the General Level of Interest Rates

Interest rates are the result of an equilibrium between supply and demand in the market, determined by the scarcity of capital and the rate of return on capital.

1. Scarcity of capital

The scarcity of capital is a key factor affecting interest rates. Capital is the physical and human resources used to produce goods and services. At any given time and place, capital also exhibits scarcity as the demand for goods and services always exceeds the supply.

2. Rate of return on capital

Rate of return on capital is the return earned on invested capital, which reflects the capital owner's expectation of return on investment. When the rate of return on capital is high, it means that capital owners have higher expectations of future returns, which increases the supply of capital in the market and makes interest rates fall. Conversely, if the rate of return on capital falls, then interest rates will fall accordingly.

3. The Determination of Interest Rates

In summary, interest rates are the result of an equilibrium between the scarcity of capital and the rate of return on capital. When the scarcity of capital increases, the supply is tight and the interest rate rises; while when the rate of return on capital falls, the supply of capital increases and the interest rate falls. Thus, changes in interest rates reflect changes in market supply and demand and are important price signals in a market economy.

The theory of time-varying interest rates and the cyclical fluctuation of interest rates

1. The theory of time-varying interest rates

The theory of time-varying interest rates was put forward by Pompeavec, a representative of the Austrian school of economics. He believed that the interest rate is due to the difference between the supply and demand of capital in time. In Pombavik's view, capital can be divided into spot capital and future capital. Spot capital is capital that can be used immediately, while future capital is capital that needs to wait before it can be used.

The supply of spot capital is usually greater than the supply of future capital because people prefer to use their existing capital for production rather than storing it for future use. Therefore, the scarcity of future capital causes interest rates to rise.

2. Fluctuations in interest rates

Fluctuations in interest rates are a reflection of the economic cycle. During an economic boom, the demand for capital increases due to active production activities, which can lead to a rise in interest rates. At the same time, economic prosperity also means that people's incomes increase and they are more willing to borrow to spend or invest, which also pushes interest rates up.

On the contrary, during a recession, production activity slows down, the demand for capital decreases, and interest rates fall accordingly. In addition, as income expectations fall during a recession, people may borrow less, which can also cause interest rates to fall.