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 the other hand. the Loadable- Funds Theory explains interest over a per iod of time when the supply of money is supposed 10 be fluctuating.

(ii) In the Keynesian theory. the quantity of money is regarded as an independent variable and is not affected by changes the rate of interest. On Ole other hand, according to the loan able funds theory, the stock of money itself depends on Ole rate of interest  Keynesian the ry explains interest in a situation of less than full en employment, while the loadable funds theory is valid In the long-run period when full employment of human and material resources has been radicalism, In this sense. the tw 0 theories may be regarded as complementary.  According to the Keynesian theory. it is the demand for and supply of money which determine the rate of interest. whereas according to the loadable funds theory. the rate of interest is simply the price of credit and, as such. i~ determined by the demand for. and supply of, credit. Hence, the banking system can influence the rate of interest by expanding or contracting credit. In the Keynesian theory. supply of money is regarded as given. (rj The loadable funds theory emphasizes the crucial interdependence between Ole loan market and the commodity market, since money can he used for different alternatives like purchasing of consumption goods, investment in industries and for purchasing bonds. Keynes. on the other hand. ignores this interrelationship. Unlike Keynes, the loadable funds theory does not accept Ole notion that shifts in liquidity preference can affect the long-run equilibrium rate of interest.

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Keynesian vs. Loanable Funds Theory