Answer to Question #127865 in Economics for Adi

Question

what are the relationships among capital,interest rates, and interest income?

Answer 1

By purchasing elements of real capital, the entrepreneur is guided by the principle opportunity costs. He makes a choice: either to acquire (or take in rent) a building or equipment, or put an equivalent cash the amount to a bank account. In the latter case, he will receive income annually

as a percentage at a specific rate. Obviously, the choice will be made in business benefit if the brought real capital, the annual income will be at least not less the annual amount of bank interest. Therefore, for the price of real capital services the price of services of money capital is taken as a percentage. In this connection, let us now turn to money capital and consider the factors determining the value of the interest rate.

The value of the interest rate is ultimately determined the ratio of the value of present and future goods. Before the individual usually there is a problem of choice in time: what to prefer - the consumption of goods in current or future period. If, having a certain amount of money, he

prefers to increase consumption in the future for any reason (for example, will set as its goal to accumulate a certain amount of money to reaching retirement age), then he will be forced to donate some part of current consumption. To do this, he will put this or that amount money to the bank in order to return it with interest after a certain period. Percent for him will represent the price of abandoning current consumption.