<p>Required rate of return on assets <span class="math-container">$r_i$</span> is the return an investor into some sort of business activity/capital investment, or various other assets, would demand in order to invest. The <span class="math-container">$i$</span> would denote business or activity, that is you can have required rate of return on your investment into Apple, Samsung or whatnot.</p>
<p><span class="math-container">$r$</span> is the rate at which you can borrow and lend at a general money market. Although, note in real life money markets are organized via financial intermediaries, which due to various reasons leads interest rate at which you lend and borrow different. But in a stylized model of money market there would be just single rate <span class="math-container">$r$</span> at which people can lend and borrow and that’s what Keynes describes.</p>

CC BY-SA 4.0
2023-01-09T21:16:59.037Z
Thank you very much. And is it possible that there is equality between them ($r^{*}=r_i$)?
Felipe Morelli
CC BY-SA 4.0
2023-01-09T21:22:45.223Z
@FelipeMorelli in some models that is possible
1muflon1
CC BY-SA 4.0
2023-01-11T10:17:00.457Z
Another explanation I heard was the following: one of the assets in the portfolio would be government bonds ($r_{b} = a_{b} + q_{b} - c_{b} + l_{b} | b \in i $). And in this case $q_{b}$ would be equal to $r^{*} | M^{d} = M^{s}$.
Felipe Morelli
CC BY-SA 4.0
2023-01-11T10:28:36.183Z
@FelipeMorelli in some models people do just use bonds but I am pretty sure Keyens was not just talking about government bonds
1muflon1
CC BY-SA 4.0
2023-01-08T16:27:44.060Z
2023-01-08T16:27:44.060Z
1muflon1
<p>For Keynes the economy's interest rate is defined from the equality between money supply and demand. However, he also defines the rate of return on assets (which in equilibrium would all be equal). What is the difference between these two rates.</p>
<p>More clearly, one rate is derived from the equality of money supply and demand (<span class="math-container">$r^{*} | M^d=M^s$</span>) and the other is derived from the equilibrium between the rates of return (<span class="math-container">$r_i = a_i + q_i - c_i +l_i | r_i=r_j$</span>).</p>
<p>r = asset rate of return<br />
q = asset's profit<br />
c = cost of carrying the asset<br />
l = liquidity premium</p>
<p>What is the difference between <span class="math-container">$r^{*}$</span> and <span class="math-container">$r_{i}$</span>?</p>

<macroeconomics><interest-rate><capital-returns><keynes>
Difference between interest rate and rate of return (Keynes)
Felipe Morelli
# Difference between interest rate and rate of return (Keynes)

(Asked by: username_0 on 2023-01-08)

For Keynes the economy's interest rate is defined from the equality between money supply and demand. However, he also defines the rate of return on assets (which in equilibrium would all be equal). What is the difference between these two rates.

More clearly, one rate is derived from the equality of money supply and demand ($r^{\*} | M^d=M^s$) and the other is derived from the equilibrium between the rates of return ($r\_i = a\_i + q\_i - c\_i +l\_i | r\_i=r\_j$).

r = asset rate of return  
q = asset's profit  
c = cost of carrying the asset  
l = liquidity premium

What is the difference between $r^{\*}$ and $r\_{i}$?

**Tags:** macroeconomics, interest-rate, capital-returns, keynes

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## 1 answers

### Answer by username_1 on 2023-01-08. Score: 0 | Accepted answer

Required rate of return on assets $r\_i$ is the return an investor into some sort of business activity/capital investment, or various other assets, would demand in order to invest. The $i$ would denote business or activity, that is you can have required rate of return on your investment into Apple, Samsung or whatnot.

$r$ is the rate at which you can borrow and lend at a general money market. Although, note in real life money markets are organized via financial intermediaries, which due to various reasons leads interest rate at which you lend and borrow different. But in a stylized model of money market there would be just single rate $r$ at which people can lend and borrow and that’s what Keynes describes.

> **Comments:**
> **username_0**: Thank you very much. And is it possible that there is equality between them ($r^{*}=r_i$)?  
> **username_1**: @FelipeMorelli in some models that is possible  
> **username_0**: Another explanation I heard was the following: one of the assets in the portfolio would be government bonds ($r_{b} = a_{b} + q_{b} - c_{b} + l_{b} | b \in i $). And in this case $q_{b}$ would be equal to $r^{*} | M^{d} = M^{s}$.  
> **username_1**: @FelipeMorelli in some models people do just use bonds but I am pretty sure Keyens was not just talking about government bonds  

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