Capital...

Article:
Scratch your head about interest-rates ?

Comment;

Lending rate is always higher than deposit rates because it is the income banks have for paying interest rate on deposits... In equilibrium lending rate is equal to the deposit rate, under perfect competition. Under imperfect competition interest rate (price of capital) is always slightly higher than the cost of capital, or may be more, above marginal cost. May be because of banks management cost…

      Inequilibrium, under perfect competition, the demand and supply of liquidity would intersect each other at same place and at the same rate, with demand curve sloping downward towards right and the supply curve upward sloping towards right... When interest rate will increase supply of liquidity will increase and demand will go down, and, when interest rate will fall supply will go down and demand will go up... We can assume the deposit interest rate as the cost of liquidity (capital) and the lending rate as the price of liquidity, capital... and the price of capital would be equal to the cost, as they would be equal under perfect competition .This is true under the general equilibrium perfect competition, price will equal marginal cost... Under imperfect competition partial equilibrium, the cost and price depend on the demand and supply conditions of the economy... the lending rate for an economy will be always higher than the deposit rate taking into account the management cost for managing liquidity...

If supply exceeds demand and prices start falling, the central bank would reduce interest rates so that the economy converges to equilibrium by increasing demand…

If demand exceeds supply and prices start climbing, the central bank would increase interest rates and the economy will, again, converge to equilibrium by decreasing demand…