Figure 14.3 shows how the real interest rate is determined by the supply and demand for loans. Explain why this process also determines the rate of return that any capital owner should expect to earn on investments in physical capital. That is, how do you reconcile a "loanable funds" theory of interest rates with a "return on capital" theory of interest rates? If you are adventuresome, you might also seek to reconcile these theories with whatever theory of interest rates you learned in macroeconomics.
Figure 14.3
The Real Interest Rate Is Determined in the Market for Loans

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Real Interest rate Quantity of loans per perlod