Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 34

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 The real interest rate is determined in the market for loans
Individuals supply loans by saving. Firms demand loans to finance capital equipment. These two forces determine the equilibrium real interest rate, r*.