Homework Answers
Answer : (b) loanable funds and the returns earned by capital as an input in the production process
Basically, interest is the amount paid by a borrower to a lender in return of the money borrowed. It is usually calculated annually. It is the fees paid by a borrower for using borrowed money for his/her needs in case of loanable funds.
Also in real economic sense, the return to capital and a factor of production (in terms of machinery, raw materials, factory plant, etc.) can be defined as interest. This interest is the price of capital. Capital refers to finance or money which is used as investment for business. In this case, interest is an investor's equity in business.
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