Determination of Interest Rate: According to Keynes, the rate of interest is determined by the demand for money and the supply of money. OM is the total amount of money supplied by the central bank. At point E, demand for money becomes equal to the supply of money. Thus, the equilibrium interest rate is determined at or. Now, suppose that the rate of interest is greater than or. In Keynes’ theory changes in the supply of money affect all other variables through changes in the rate of interest, and not directly as in the Quantity Theory of Money. 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 demand and supply of money. Keynes’ liquidity preference theory of interest highlights the importance of money in the determination of the rate of interest. According to this theory, interest is a monetary phenomenon and the rate of interest is determined by the demand for and supply of money. 2. Importance of Liquidity Preference: Liquidity preference or the demand for money is of special significance in Keynes’ theory of interest. According to Lord Keynes, the rate of interest is deter­mined by the demand for and the supply of money. Interest is the reward for parting with liquidity for a specified period of time. The last two theories are the most important ones and may now be discussed in detail. 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. The Keynesian theory takes a completely opposite view: according to Keynes, interest is primarily a monetary phenomenon. The rate of interest is determined by the money supply and hence on monetary policy indirectly, and on the demand side it is influenced by the attitude of people towards holding of cash balances, and also on the motive for which such balances are held.

Keynes attacked the classical theory of interest on the ground that it is indeterminate. According to classical theory the rate is determined by the intersection of 

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.

interpretations of Keynes's General Theory, subsequently emerged in its 8) natural rate of interest, are the marginal efficiency of capital and the money rate of interest. (165). (ii) The IY curve is determined by the state of the economy, not by 

Post‐Keynesian monetary theorists divide into two camps with respect to the determination of interest rates: the 'markup school'and the 'liquidity preference  John Maynard Keynes The General Theory of Employment, Interest and Money. Chapter 13. The General Theory of the Rate of Interest. I. WE have shown in  The rate of interest will be determined at that level which makes the demand for money equal to the supply. This looks a most revolutionary doctrine; but it is not, I  

The Keynesian theory takes a completely opposite view: according to Keynes, interest is primarily a monetary phenomenon. The rate of interest is determined by the money supply and hence on monetary policy indirectly, and on the demand side it is influenced by the attitude of people towards holding of cash balances,

The Keynesian theory takes a completely opposite view: according to Keynes, interest is primarily a monetary phenomenon. The rate of interest is determined by the money supply and hence on monetary policy indirectly, and on the demand side it is influenced by the attitude of people towards holding of cash balances, and also on the motive for which such balances are held. Keynes' Theory of the Interest Rate: A Critical Approach 5 Keynes criticized the output of the classics in this area. The criticism focused on an erroneous take on the rate of interest which – according to Keynes – was due to disregarding the impact that income has on the level of the interest rate.

Is the interest rate determined by arrangements governing the flow of credit ( classical loanable funds theory) or by asset portfolio adjustments (Keynes's liquidity 

Harrod understood that if the multiplier is at work, then we are short of one equation to determine the interest rate. He agreed that Marshallian theory explains the  to be determined by the system and (9) becomes a "genuine" equation. We should add that, even in the "Keynesian" system, it is admitted that the wage rate will  In the traditional, Keynesian theory of the "own rate of money interest" the economic equilibrium and the determination of the equilibrium interest rates in the  will start rising till it reaches the equilibrium rate OR. Determination of the Rate of Interest-. Department of Economics and Foundation Course, R.A.P.C.C.E.  24 Jan 2013 In the Classical theory, the interest rate ensures that the income that is for Keynes, the rate of interest did not determine aggregate savings 

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