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Questions and Answers
According to Keynes, what are the determinants of the interest rate in the classical model?
According to Keynes, what are the determinants of the interest rate in the classical model?
- Real factors of the supply of saving and the demand for investment (correct)
- Government policies and regulations
- Monetary factors alone
- International trade dynamics
What does Keynes consider as the reward for 'parting away with liquidity'?
What does Keynes consider as the reward for 'parting away with liquidity'?
- Stock dividends
- Tax incentives
- Interest (correct)
- Real estate appreciation
What does Keynes refer to as the preference for holding cash?
What does Keynes refer to as the preference for holding cash?
- Cash aversion
- Investment inclination
- Liquidity preference (correct)
- Asset propensity
In Keynesian analysis, what are the determinants of the interest rate?
In Keynesian analysis, what are the determinants of the interest rate?
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What does Keynes consider interest to be purely?
What does Keynes consider interest to be purely?
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Study Notes
Classical Model
- In the classical model, the interest rate is determined by the interaction between the supply of savings and the demand for investment.
- According to Keynes, the determinants of the interest rate in the classical model are the supply and demand for loanable funds.
Liquidity Preference
- Keynes considers the reward for 'parting away with liquidity' as interest.
- He refers to the preference for holding cash as liquidity preference.
Keynesian Analysis
- In Keynesian analysis, the interest rate is determined by the liquidity preference and the money supply.
- The determinants of the interest rate are the desire to hold cash and the availability of cash.
Interest
- According to Keynes, interest is purely a monetary phenomenon.
- He considers interest to be the reward for parting with liquidity, rather than a reward for waiting or a return on investment.
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