oh. ii THE CONDITIONS OP EQUILIBBIUM 155

term of our second Fundamental Equation to be zerothe natural-rate of interest, and the rate which actuallyprevails the market-rate of interest. Thus the natural-rate of interest is the rate at which saving and thevalue of investment are exactly balanced, so that theprice-level of output as a whole (n) exactly corre-sponds to the money-rate of the efficiency-earnings ofthe Factors of Production. Every departure of themarket-rate from the natural-rate tends, on the otherhand, to set up a disturbance of the price-level bycausing the second term of the second FundamentalEquation to depart from zero.

We have, therefore, something with which theordinary Quantity Equation does not furnish us,namely, a simple and direct explanation why a risein the Bank-rate tends, in so far as it modifies theeffective rates of interest, to depress price-levels. To amore complete explanation of the theory of Bank-rate we shall return in Chapters 13 and 37.

(iii.) Inflation and Deflation

We have seen that there are two main types offluctuation, which can influence price-levels, corre-sponding to the two terms of our first FundamentalEquation, of which the second can be divided into twoparts. We may have a rise or fall in W 1} the rate ofefficiency-earnings. We shall call this Income Inflation(or Deflation), corresponding to changes in the firstterm of the Fundamental Equation. We may have arise or fall of Q, the total profits above or below zero,due to an inequality between saving and the valueof investment. We shall call this Profit Inflation (orDeflation).

Further, since Q = Qi + Q 2 , where Q x and Q 2 are asdefined on p. 137 above, Profit Inflation (or Deflation)is the sum of two terms, Q x and Q 2 , which we may callCommodity Inflation (or Deflation) and Capital Infla-

e