THE THEORY OF INTEREST

ously falling rate of interest but with a continuing lowrate of interest, and a constant price level would be asso-ciated with a constant rate of interest—assuming, ineach case, that other influences than price change re-mained the same.

This perfect theoretical relationship of interest rates

to price levels, assuming perfect foresight, is shown in

i « 10*

i -

15*

i = 5*

Annumft

ft Normal H

ate

i = 0*

1 = -5*

- 1 -

CHART 43

Theoretical Relation of Price Level (P) and Interest Rates (i).

Chart 43, showing high (not rising) interest rates whileprices are rising, and low (not falling) interest rateswhile prices are falling. The real rate would remainconstant at, say, 5 per cent under the ideal conditionshere assumed.

In this chart, i stands for interest rate and P' for pricechange, but the upper line indicates the price level. When

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