According to Keynes, who propounded this theory, interest is not a reward for waiting, nor is it a payment for time preference, but it is a reward for parting with liquidity. This theory not only explains why interest is paid; it also explains how the rate of interest is determined. Theories of Interest-Rate Determination: It is the Keynesian theory of interest that recognises the important role of liquidity preference in the determination of the interest rate. 1. Indeterminate Theory: Keynes has maintained that the classical theory is indeterminate in the sense that it fails to determine the interest rate. In this theory, interest is determined by the equality of demand and supply. But the position of savings varies with the income level. Thus, unless we know the income, interest rate cannot be determined. 2. The Keynesian theory of interest is not only indeterminate, but is also an inadequate explanation of the determination of the rate of interest. It treats the interest rate as a purely monetary phenomenon and by neglecting the real factors makes the theory narrow and unrealistic. According to this theory, the rate of interest is determined by the demand for and supply of loanable funds. So, according to this theory the rate of interest depends upon demand and supply of loanable funds.
This paper presents the Post Keynesian theory of endogenous money supply and According to Keynes' theory of interest rate determination, as described in Suggested Citation: Tymoigne, Éric (2006) : Fisher's theory of interest rates The first criticism of Fisher's theory was provided by Keynes in the General Theory ( 1936). Thus, given r* (the required real rate determined independently in the
1. Indeterminate Theory: Keynes has maintained that the classical theory is indeterminate in the sense that it fails to determine the interest rate. In this theory, interest is determined by the equality of demand and supply. But the position of savings varies with the income level. Thus, unless we know the income, interest rate cannot be determined. 2. The Keynesian theory of interest is not only indeterminate, but is also an inadequate explanation of the determination of the rate of interest. It treats the interest rate as a purely monetary phenomenon and by neglecting the real factors makes the theory narrow and unrealistic. According to this theory, the rate of interest is determined by the demand for and supply of loanable funds. So, according to this theory the rate of interest depends upon demand and supply of loanable funds. The Keynesian Theory Keynes's theory of the determination of equilibrium real GDP, employment, and prices focuses on the relationship between aggregate income and expenditure. Keynes used his income‐expenditure model to argue that the economy's equilibrium level of output or real GDP may not corresPond to the natural level of real GDP.
These “substantial matters” included the liquidity preference theory of interest ( LPT). For. Keynes, the determination of the rate of interest did not concern saving, The rate of interest, according to Keynes, is a purely monetary phenomenon, a reward for parting with liquidity, which is determined in the money market by the 19 Sep 2019 And interest is the reward for parting with liquidity. However, the rate of interest in the Keynesian theory is determined by the demand for money
22 Oct 2015 I actually found that Keynes's discussion in the General Theory was less If the rate of interest is not determined by saving and investment in