How was the rate of interest defined by Keynes?
Asked by deerdre
(33 points)
on Sep 18, 2009
under Money and Finance
1 answers
How was the rate of interest defined by Keynes?
 helenka (39 points) |
on Sep 18, 2009According to Keynes the two determinants of investment are (i) MEC (ii) Rate of Interest. Keynes defines rate of interest as follows: “The rate of interest is the premium which has to be offered to the people so as to induce them to hold their wealth in some form (way) other than hoarding money”. Keynes says that there are two determinants of rate of interest i.e. 1) Liquidity preference/demand for money. The liquidity preference shows a negative correlation with the rate of interest while the supply of money has a positive correlation, with the interest rate. The equilibrium between these two-functions determines the equilibrium rate of interest. |
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