Capital is an essential factor of production, and economists use the term
in three different ways. Human capital, which we discussed in Chapter
14 , is the set of skills that workers acquire through education and on-
the-job training. Physical capital is a produced factor of production, such
as a machine, a factory, an office building, or a bridge. Financial capital
refers to financial assets in the form of loans, bonds, or stocks. In this
chapter, we focus on what economists call the “capital market,” which
involves both physical and financial capital. We also examine the crucial
role played in this market by the interest rate.
4. explain why the supply of saving is positively related to the
interest rate.
5. understand how the equilibrium interest rate is determined and
why it changes over time.