Criticism

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Criticism Most of the criticisms made against the classical theory are valid also in the case of the loanable funds theory. In fact. there is not much difference in the classical and loanable funds theories. The difference lies only in the meaning of saving. In the classical theory. ‘savings’ is infact the same thing as the “loanable funds” of the loanable […]

Equilibrium Between Demand for and Supply of Loanable

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Equilibrium Between Demand for and Supply of Loanable  The rate of interest will be determined by the equilibrium between the total demand for loanable funds and the total supply of loanable funds  In this figure LS is the total supply curve of loanable funds, which has been derived by the lateral summation of the saving curve S, dishoarding curve DH, B […]

Demand for Loanable Funds

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Demand for Loadable Funds The demand for loadable funds comes mainly from three fields: (i) investment, (ii) consumption and (iii) hoarding. The bulk of demand for loadable funds comes from business firms which borrow money for purchasing or making new capital goods. including the building up (If inventories. Demand for loadable funds for investment purposes by business firms is the most important constituent of total […]

LOANABLE FUNDS THEORY OF INTEREST

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LOANABLE FUNDS THEORY OF INTEREST The loanable funds theorists believed in the Time Preference explanation of how interest arises. According to Loanable Funds Theory, also called the Neoclassical Theory. interest is the price paid for the use of loanable funds. Like the Classical and Keynesian theories of interest. it is also a demand and supply theory. It asserts that rate of interest […]

Criticism

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Criticism The Classical Theory of Interest came in for serious criticism at the hands of Keynes. firstly. it is pointed out that Classical  heory of interest is based upon the assumption of full employment of resources. . In other words. it assumes that an increase in the production of one thing must mean the withdrawal of some resources from the production […]

Equilibrium between Demand and Supply

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Equilibrium between Demand and Supply The rate o( interest is determined by the interaction of the forces of demand For Capital (or investment) and the supply of savings. The rate of interest at which the demand for capital (or demand For Savings’ to Invest in capital goods) and the supply of savings are in equilibrium will be the rate […]

Demand for Savings

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Demand for Savings The-demand for capital goods comes from firms which desire to invest, that is, to purchase or to make new capital goods. Capital goods arc demanded because they can he used to produce consumer goods – because they have a revenue productivity like all other factors. For any given type of capital asset. e.g a machine. it is possible […]

CLASSICAL OR REAL THEORY OF INTEREST

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CLASSICAL OR REAL THEORY OF INTEREST There was no unanimity among the classical economists on the point as to how interest arises or why interest is paid. They had different views on this point. But they all agreed that the rate of interest is determined by the equilibrium of savings and investment. The classical theory of interest also goe hy the name […]

HOW RATE OF INTEREST IS DETERMINED

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HOW RATE OF INTEREST IS DETERMINED Among the theories which seek to explain the determination of the rate of interest we might mention: (i) Classical or Real Theory. (ii) Loadable Funds or co-Classical Theory, and (iii) Keynesian or Liquidity Preference Theory. All these theories of interest seek to explain the determination of the rate of interest though the equilibrium between the […]

Liquidity Preference Theory

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Liquidity Preference Theory According to Keynes, interest is not a reward for waiting, nor is it a payment for time preference. Tile rate of interest is a reward fur parting with liquidity. This theory not only explains why interest arises, but it also explains how the rate of interest is determined. We shall discuss this theory in a later section of […]