Map of Baghdad Tourist on Classical economists argue that the rate of interest is a real phenomenon. The interest rate is determined by the demand for investment funds and by thrift, supply of funds in the form of SAVING. The primary objective of borrowing is investment, that is, the addition to productive capital of machines, buildings, and inventories. The basic factor underlying the demand schedule is the productivity of additions to capital, or, the marginal productivity of capital.
The downward sloping of the demand for capital goods reflects the principle of diminishing marginal returns, that is, the larger the use of capital goods, the less the increment of production from their further use, or, the greater the use of capital, the smaller the marginal product of capital.
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Map Of Baghdad Tourist
The saving schedule reflects savers' impatience, the increasing marginal disutility of abstinence or time preference. A positive rate of interest is necessary to produce saving, and a rising rate of interest is necessary to secure increasing amounts of saving, thus reflecting the upward sloping supply schedule.
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