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Cochabamba Travel on The interest rate is 112 capital simply a theoretical construct when it comes to physical capital and should be used only when considering capital values. Now, the rate of interest plays a significant role in the determination of the capital stock. Wicksell, Ricardo, and others have all based their theory of capital directly on a theory of interest and the two are inseparable despite the Cambridge Controversy. Wicksell sought to reconcile a theory of saving (based on waiting) and the demand for capital. Wicksell used both short-run and long-run dynamics in showing how the interest rate affects SAVING and investment. In the short-run, the money rate of interest could deviate from the natural rate of interest (a long-term interest rate determined by supply and demand for saving). This would set in motion price changes that would provide what Wicksell saw as the missing link in quantity theories of money, namely the dynamics by which a change in the quantity of money (or equivalently in a credit economy, the bank rate) brings about a change in the price level. Cochabamba Travel 2016.

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