Could You Compare Fisher's Theory Of Interest With The Loanable Funds Theory?


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Mehreen Misbah answered
Both Fisher's theory of interest (as evident from the name) and the Loanable Funds Theory present approaches on the interest rate, giving reasons to espouse their arguments.

Fisher's theory, in its basic form, states that the long-run interest rate and the investment depends upon two major factors. The first factor is society's propensity to save money and the second factor is technological development.

As for the loanable funds theory, it states that the general level of the interest rate is determined by the interaction of two forces. The demand of funds by firms, individuals and governments, which is the first factor and is negatively related to the interest rate and the supply of funds by firms, individuals and governments, which constitutes the second factor and is directly proportional to the rate of interest.

A notable point of consideration is that government supply and demand is not usually affected by the interest rate.

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