Understanding Theories of Interest in Macroeconomics

As you learnt in the IS-LM model, which we covered in the previous session, interest refers to the amount that you get paid for saving your money or the amount that you need to pay for borrowing money.

With this understanding of interest rates, let's watch the upcoming video and learn about the theories of interest from Chris.

So, in the video, you learnt that interest rate and the demand for money are inversely related:

• With an increase in interest rates, the demand for money decreases, as it becomes more expensive to borrow money.
• With a decrease in interest rates, the demand for money increases, as it becomes less expensive to borrow money

You also learnt how interest rates affect GDP and also learnt how they are determined for different investment durations through the example of the yield curve.