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Explain the classical Fisherian interest model. When is an agent a net borrower versus a net...

Explain the classical Fisherian interest model. When is an agent a net borrower versus a net lender?

Please draw a diagram for both and explain each part of it.

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Answer #1

According to the classical theory, the interest rate is determined by the intersection of the demand and supply of savings. Along with the assumption that marginal productivity of capital is diminishing and demand for capital can be raised to the point where the marginal productivity of capital is equal to the interest rate charged on it. we the marginal productivity of capital is greater than the rate of interest, it is beneficial to borrow money and vice-versa.

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