Accession Number : AD0746152

Title :   On the Theory of Interest.

Descriptive Note : Research rept.,

Corporate Author : CALIFORNIA UNIV BERKELEY OPERATIONS RESEARCH CENTER

Personal Author(s) : Gale,David

Report Date : JUN 1972

Pagination or Media Count : 33

Abstract : 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)

Descriptors :   (*ECONOMICS, THEORY), COSTS, MONEY, MATHEMATICAL MODELS, THEOREMS, OPTIMIZATION

Subject Categories : Economics and Cost Analysis
      Operations Research

Distribution Statement : APPROVED FOR PUBLIC RELEASE