# Theories of Interest: Caiib Paper 1 (Module A), Unit 4

## Theories of Interest: Caiib Paper 1 (Module A), Unit 4

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So, here we are providing “Unit 4: Theories of Interest” of “Module A: Economic Analysis” from “Paper 1: Advanced Bank Management (ABM)”.

The Article is Caiib Unit 4: Theories of Interest

### ♦Interest

Interest is a payment made by a borrower for the use of a sum of money for a period of time.
Three elements can be distinguished in interest:

• Payment for the risk involved in making the loan
• Payment for the trouble involved
• Pure interest, i.e. a payment for the use of money.
##### Keynes’ Liquidity Preference Theory of Rate of Interest

The position of money demand curve depends upon two factors:

1. The level of nominal income and
2. The expectation about the changes in bond prices in the future which implies change in rate of interest in future.
##### IS and LM curves Theory promulgated by Sir Hon Richard Hicks and Alvin Hansen

Renowned Economists, Sir John Richard Hicks and Alvin Hansen, have brought about a synthesis be-tween the classical and Keynes’ theories of interest and have thereby succeeded in propounding an adequate and determinate theory of interest. This involves 3 steps:

The IS curve and the LM curve relate the two variables

• Income and
• the rate of interest

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