ABSTRACT
It has been stated above that the rate of interest cannot be determined by the demand for and the supply of capital because investment automatically brings into existence an equal amount of savings. Thus, investment ‘finances itself’ whatever the level of the rate of interest (see p. 50). The rate of interest is, therefore, the result of the interplay of other factors. We shall argue that the short-term rate is determined by the value of transactions and the supply of money by banks; and that the long-term rate is determined by anticipations of the short-term rate based on past experience and by estimates of the risk involved in the possible depreciation of long-term assets (see Chapter 7).
