The Role of Interest Rate in Fiscal Policy
It is believed that present consumption is preferred to future consumption. Parting with one’s money deprives consumers from present-time consumption. The interest rate is compensation for the loss of immediate gratification. Different people place different values on this loss. Therefore, while some might be willing to lend or borrow at a given interest rate, others might not. This discrepancy is part of the reason for the existence of loanable funds. Lenders give up the use of their assets, and the utility that is derived from those assets, in return for earning income in the form of interest.
According to classical economists, who view the loanable funds market the same as any other good, ...
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