CAN THE RATE OF INTEREST FALL TO ZERO?

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CAN THE RATE OF INTEREST FALL TO ZERO? Theoretically, a zero rate of interest can be conceived. As pointed out above as time goes on, people’s power to save and will to save tend to increase. The former because of the rising productive capacity and the latter because of the greater foresight and the latter because of the greater foresight and […]

Effect of Changes tile Variables

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Effect of Changes tile Variables With the aid of Hicks-Hansen analysis, we can explain more satisfactorily the effect of changes in certain important economic variables such as desire to save, the supply of munch, investment, liquidity preferences on the rate of interest. This is illustrated in Fig. 34.8. Changes ill to- Supply . Now suppose that the supply of money has […]

MODERN THEORY OF INTEREST: HICKS-HANSEN SYNTHESIS

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MODERN THEORY OF INTEREST: HICKS-HANSEN SYNTHESIS We have discussed above the various theories of the rate of interest put forward from time to lime. But we have seen that all these theories suffer from various drawbacks and are indeterminate. The Keynesian theory considered only the monetary factors and the classical theory only the real factors as determining rate of interest. Modem economists […]

Keynesian vs. Loanable Funds Theory

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Keynesian vs. Loadable Funds Theory We may note below a few points of difference between the Keynesian Theory and the Loadable Funds Theory:- (i) Keynesian theory regards money as stock. whereas the loadable funds theory treats money as a flow. That is why Keynesian Theory explains the rate of interest at any given moment when the money stock is assumed to be fixed. On […]

KEYNESIAN AND OTHER THEORIES OF INTEREST COMPARED

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KEYNESIAN AND OTHER THEORIES OF INTEREST COMPARED  Keynesian Classical Theory The Keynesian Theory differs from the Classical’ Theory in the following respects  Ii) The classical theory applies to a situation of full employment and constant national income, whereas the Keynesian Theory assumes an equilibrium with less than full employment, where both employment and income are fluctuating. (ii) The second difference derived from the […]

Factors Governing Liquidity Preference

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Factors Governing Liquidity Preference Liquidity preference of a particular individual depends upon several considerations: The question is: Why should the people hold their resources liquid or in the form of ready money. when they can get interest by lending such resources? The desire for liquidity arises because of three motives: (i) the transactions motive. (ii) the precautionary motive. and (iii) the speculative […]

LIQUIDITY PREFERENCE THEORY

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LIQUIDITY PREFERENCE THEORY  In this epoch-making book. “The General Theory of Employment, Interest and Money”. the late Lord Keynes gave a new view of interest. According to him. “Interest is the reward for parting with liquidity for.a specified period:’ 6  with a given income has to decide first how much of this income he is going to consume and how much […]

Criticism of Liquidity Preference Theory

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Criticism of Liquidity Preference Theory Keynes theory, too, has met with criticism: Firstly, it has been pointed out that the rate of interest is not purely a monetary phenomenon. Real forces like productivity of capital and thrifting css or saving by the people also play an important role in the determination of the rate of interest. Secondly~’. Keynes makes the […]

Determination of tile Rate of Interest

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Determination of tile Rate of Interest According to Keynes, the demand for money, i.e the liquidity preference and supply of money, determine the rate of interest. It is, in fact, the liquidity preference Cor speculative motive which, along with . the quantity of money, determines the rate of interest. We have explained above the speculative demand for money in detail. As […]

Supply of Loanable Funds

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Supply of Loadable Funds The supply of loadable funds is derived from four basic sources, namely, (0) savings. (b) dis hoarding, (c) bank credit. and (d) disinvestment. (0) Savings, Savings by individuals or households constitute the most important source of loadable funds. In the lovable funds theory. savings are looked at in either of these two ways, firstly, as ex ante savings, i.e., savings planned by individuals at the beginning of a period in the hope […]