What is Keynesian theory of interest?

What is Keynesian theory of interest?

The Keynesian theory of interest rate refers to the market interest rate, i.e. the rate „governing the terms on which funds are being currently supplied‟ (Keynes, 1960, p. 165)1. According to Keynes, the market interest rate. depends on the demand and supply of money.

What are the defects of Keynes theory of interest?

Supply Side Ignored: Keynes theory has limited validity from supply side also. It is not possible to reduce the rate of interest by increasing money supply and vice-versa. It is possible that when supply is increased, increase in liquidity preference in the same ratio may keep the interest rate unaffected.

Is Keynes theory of rate of interest indeterminate?

Thus the Keynesian theory, like the classical, is indeterminate. In the Keynesian case the money supply and demand-schedules cannot give the rate of interest unless we already know the income level; in the classical case the demand and supply schedules for saving offer no solution until the income is known.

What is the theory of interest?

The classical theory of interest also known as the demand and supply theory was propounded by the economists like Marshall and Fisher. It is called the real theory of interest in the sense that it explains the determination of interest by analyzing the real factors like savings and investment.

What is modern theory of interest?

According to the modern theory of interest, the equilibrium rate of interest and equilibrium level of income are determined simultaneously at the point of intersection between the IS and the LM curves. All other combinations of income and rate of interest are disequilibrium combinations.

Which is known as monetary theory of interest?

The theory of interest has been evolved along two distinct lines. Marget calls these doctrines as “real capital theories”. ‘ ADVERTISEMENTS: Secondly, we have what is known as the ‘monetary theory’ of the rate of interest, which is stated in terms of demand for and supply of loanable funds or credit or claims.

What is classical theory of interest?

The classical theory is concerned with the real rate of interest which is determined purely by the real factors of saving and investment. The concept of real rate of interest can be defined as the money or market rate of interest less the anticipated rate of inflation.

Which economic theory is best?

There are essentially two camps of economic thought, Keynesian (or demand-side economics) and supply-side economics. Keynesian economics argues that the best way to stimulate the economy is to raise government spending and cut taxes, putting more money in the hands of people and driving higher consumer spending.

What is the classical theory of interest?

Capital Theory of Interest: In the classical theory, interest is defined as reward for the use of capital and the rate of interest is determined by the demand and supply of capital. The supply of capital is a positive and the demand for capital is a negative function of the rate of interest.

How is the interest rate determined in the Keynesian theory?

However, the rate of interest in the Keynesian theory is determined by the demand for money and supply of money. Demand for money is not to be confused with the demand for a commodity that people ‘consume’. But since money is not consumed, the demand for money is a demand to hold an asset.

What was keynes’liquidity preference theory of interest?

Keynes’ theory of interest is known as liquidity preference theory of interest. Interest has been defined as the reward for parting with liquidity for a specified period.

Is the Keynesian theory indeterminate like the classical theory?

Firstly, like the classical and neo-classical theories, Keynes’ theory is an indeterminate one. Keynes charged the classical theory on the ground that it assumed the level of employment fixed. Same criticism applies to the Keynesian theory since it assumes a given level of income.

Why is the demand for money important to Keynes?

Liquidity preference or the demand for money is of special significance in Keynes’ theory of interest. The demand for money refers to the desire-of the people to hold their wealth in liquid form (i.e., to hold cash). Keynes gives three reasons for holding cash, i.e., the transactions motive, the precautionary motive, and the speculative motive.

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