This is shown as the horizontal portion of the LM curve which starts from the vertical axis in Panel (B) of Figure 9. John Maynard Keynes is often referred to as the father of macroeconomics. and “Modern Monetary Theory” Explaining persistently low interest rates despite large deficits and rising debt has been one of the central challenges of macroeconomists since the end of the Great Recession. Any differential between the market rate and the real rate represents the amount necessary to compensate lenders or borrowers for adverse changes in purchasing power resulting from anticipated inflation or deflation. It also becomes gradually perfectly inelastic shown as the vertical portion from T above on the LM curve in Panel (B) of Figure 9. The higher the rate of interest, the lower the demand for money, and vice versa. Price Level Exogenous Variable. Let us make an in-depth study of the Classical Theory of the Rate of Interest:- 1. According to Hansen, “An equilibrium condition is reached when the desired volume of cash balances equals the quantity of money, when the marginal efficiency of capital is equal to the rate of interest and finally, when the volume of investment is equal to the normal or desired volume of saving. 4. At any other rate of interest, the volume of saving induced will be more or less than the amount of investment the producers wish to undertake. Before uploading and sharing your knowledge on this site, please read the following pages: 1. Share Your PDF File
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