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8 May, 2015 - 11:20

If some income happens not to be consumed immediately it will enter the money market as a saving. This saving will be put back into the economy as investment (i.e increase in capital) when it is borrowed. The interest paid by borrowers to savers assures that no saving will be idle. The money market equilibrates through an adjustment in the interest rate.

The interest paid to those who save is an inducement to lend money. When the interest rate is high, people will want to save or lend more. On the other side of the market, the borrowers are discouraged to borrow too much by a high interest rate. Thus, the market does tend to reequilibrate under the influence of the interest rate.