Types of rate of interest

(i) Natural rate of interest: This is the rate of interest which is determined by the level of saving and investments in the economy ie it is the rate which equates the rate of saving with that of investment. If the saving are high and investment are low, the interest rate falls and vice versa.

(ii) Market rate of interest: This is the rate of interest which is determined by the demand and supply of loanable funds. If the demand for loans is higher than the supply of loanable funds the interest rate increases and vice versa.

(iii) Real rate of interest: This is the rate of interest which is determined by the general price levels or the rate .of inflation in the economy. The interest rate varies directly with the inflation rate or the general price 1evel.

(iv) Money rate of interest: This is the rate of interest which does not pay regard to the general price levels in the economy but is determined by-the institutional arrangements.