MAP Social Sciences (MASS) / Volume 1/Issue 1

REVIEW PAPER

Paradox of Real Interest Rate as Macroeconomic Equilibrating Price When Savings are Equated to ‘New’ Money

by Adisa Omerbegovic Arapovic 1 ORCID ID for Adisa Omerbegovic Arapovic

1 International Burch University, Sarajevo, Bosnia and Herzegovina

ABSTRACT

We evaluate classical macroeconomic theory IS-LM model and expose the paradox of real interest rate (r) which equilibrates S (real goods and services produced and saved in the domestic economy) and I (investments) if the loanable capital is not coming only from real savings but investments can be financed through the money creation or 'money capital' generated either through the credit expansion in the banking system due to fractional reserves banking or through the open market operations by the government. If r is exogenous and lowered through monetary policy, I is expanded beyond S, which paradoxically require higher r to correct for these disbalances in macroeconomic sense. Economic and financial system should eliminate this exogenous influence on r, by separating money creation from r, so that r is left to play its equilibrating role in macroeconomic sense. Separation of r from interest rate on money is in line with prescribed prohibition of setting any fixed reward on money per se, and in general ex-ante setting of reward in productive endeavors which is also forbidden in Islamic jurisprudence. We show that classic macroeconomic theory does not expose the effect that fresh money has on saving and capital markets from the perspective of macroeconomic balance. Therefore, macroeconomic policy should concentrate on achievement of macroeconomic targets without lowering r as it is paradox to lower the return on capital and savings to promote economic growth as higher r on capital promotes investment. This is possible if ex-ante determination of reward on borrowed funds is adopted. However, the phenomena of fresh capital creation in the form of new money and its use in financing of investments should be rethought from macroeconomic perspective and overall social justice as real savings are not of equal opportunity cost as new money (capital)?

Keywords: E4, E44, B59 (JEL Classification)

HOW TO CITE THIS ARTICLE
Omerbegovic Arapovic A. (2022). Paradox of Real Interest Rate as Macroeconomic Equilibrating Price When Savings are Equated to ‘New’ Money, MAP Social Sciences, 2(2), 8-15. doi: https://doi.org/10.53880/2744-2454.2022.2.2.8

MAP Social Sciences

Volume 1 / Issue 1

ISSN: 2744-2454/ © 2021 The Authors.
Published by MAP - Multidisciplinary Academic Publishing.

Article Submitted: 12 June 2022
Article Accepted: 29 June 2022
Article Published: 30 June 2022


Correspondence concerning this article should be addressed to the author(s).

DOI: https://doi.org/10.53880/2744-2454.2022.2.2.8

Full Article Download (PDF)


© The Author(s). 2021 Open Access Article
Creative Commons CC BY: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License, which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

It appears you don't have a PDF plugin for this browser.

Explore Articles

REVIEW PAPER

Paradox of Real Interest Rate as Macroeconomic Equilibrating Price When Savings are Equated to ‘New’ Money

Adisa Omerbegovic Arapovic 1 ORCID ID for Adisa Omerbegovic Arapovic

1 International Burch University, Sarajevo, Bosnia and Herzegovina

Published on 30 June 2022
in MAP Social Sciences: Volume 2 / Issue 2

REVIEW PAPER

Značaj odnosa s javnošću u kontekstu boljeg poslovanja i imidža kompanije

Seid Masnica 1 ORCID ID for Seid Masnica

1 Univerzitet Džemal Bijedić, Mostar, Bosnia and Herzegovina

Published on 30 June 2022
in MAP Social Sciences: Volume 2 / Issue 2

ORIGINAL RESEARCH PAPER

Electoral Preferences of Youth Voters in Bosnia and Herzegovina

Sara Arslanagić 1 ORCID ID for Sara Arslanagić , Marina Mitrović 2 ORCID ID for Marina Mitrović

1 International Burch University, Sarajevo, Bosnia and Herzegovina
2 International Burch University, Sarajevo, Bosnia and Herzegovina

Published on 22 March 2022
in MAP Social Sciences: Volume 2 / Issue 1

REVIEW PAPER

Adapting Data Collection Tools for Qualitative Research in Times of COVID-19 Pandemic

Neha Jain 1 ORCID ID for Neha Jain , Katarina Brockova 2 ORCID ID for Katarina Brockova

1 University of Applied Sciences Burgenland, Eisenstadt, Austria
2 University of Economics, Bratislava, Slovakia

Published on 11 February 2022
in MAP Social Sciences: Volume 2 / Issue 1

REVIEW PAPER

Teacher and Student Experiences in Online Classes During COVID-19 Pandemic in Serbia, Bosnia and Herzegovina and Croatia

Amila Dautbašić 1 ORCID ID for Amila Dautbašić , Senad Bećirović 2 ORCID ID for Senad Bećirović

1 International Burch University, Sarajevo, Bosnia and Herzegovina
2 International Burch University, Sarajevo, Bosnia and Herzegovina

Published on 21 January 2022
in MAP Social Sciences: Volume 2 / Issue 1

ORIGINAL RESEARCH PAPER

The Effects of Age Factor on Learning English: A Case Study of Learning English in an Online Chinese School

Ana Kusić 1 ORCID ID for Ana Kusić

1 International Burch University, Sarajevo, Bosnia and Herzegovina

Published on 21 January 2022
in MAP Social Sciences: Volume 2 / Issue 1

PREGLEDNI RAD

Pojedinac i država u 21. stoljeću: Kriza identiteta kao pokretač napretka u globaliziranom svijetu

Adem Olovčić 1 ORCID ID for Adem Olovčić Vaso Mijanović 2

1 International Burch University, Sarajevo, Bosnia and Herzegovina
2 International Burch University, Sarajevo, Bosnia and Herzegovina

Published on 03 September 2021
in MAP Social Sciences: Volume 1 / Issue 1

ORIGINAL RESEARCH PAPER

To Speak or not to Speak? Theoretical Framework of Willingness to Communicate

Emina Kahrimanović 1 ORCID ID for Emina Kahrimanović

1 International Burch University, Sarajevo, Bosnia and Herzegovina

Published on 03 September 2021
in MAP Social Sciences: Volume 1 / Issue 1

ORIGINAL RESEARCH PAPER

The Role of Reading in English Language Classrooms

Aldiana Laličić 1 , Vildana Dubravac 2 ORCID ID for Vildana Dubravac

1 International Burch University, Sarajevo, Bosnia and Herzegovina
2 International Burch University, Sarajevo, Bosnia and Herzegovina

Published on 03 September 2021
in MAP Social Sciences: Volume 1 / Issue 1

REVIEW PAPER

Twice-Exceptional, Half-Noticed: The Recognition Issues of Gifted Students with Learning Disabilities

Uma Hamzić 1 ORCID ID for Uma Hamzić , Senad Bećirović 2 ORCID ID for Senad Bećirović

1 International Burch University, Sarajevo, Bosnia and Herzegovina
2 International Burch University, Sarajevo, Bosnia and Herzegovina

Published on 03 September 2021
in MAP Social Sciences: Volume 1 / Issue 1