The Hicks-Hansen analysis is thus an integrated and determinate theory of interest in which the two determinates, the IS and LM curves, based on productivity, thrift, liquidity preference and the supply of money, all play their parts in the determination of the rate of interest. This is all circular reasoning and offers no solution to the problem of interest. Nature of Interest – […] In this theory, interest is determined by the equality of demand and supply. Definition of Interest – According to the classical economists, interest is a reward paid for the use of capital. Demand for money means the desire of the people to hold their wealth in liquid form. Thus the theory explains that the rate of interest is determined at a point where the liquidity preference curve equals the supply of money curve. John Maynard Keynes' The State of Long‐Term Expectation, From the General Theory Page 3 of 4 months or a year hence. Keynes' analysis concentrates on the demand for and supply of money as the determinants of interest rate. It is an inevitable result of an investment market whose organization encourages these behaviors. Keynes’s theory and policy before the General Theory Cambridge Keynes was, from his first contributions, a monetary economist. A lower rate of interest will increase investment, output, employment, income and savings. Theory, a theory of money as a store of value provided the fundamental break with classical analysis, and was genuinely a revolution in economic thought. Criticisms of Keynes’s Liquidity Theory of Interest: The Keynesian theory of interest has been severely criticised by … Keynes’ Liquidity-Preference Theory of Interest furnishes too narrow an explanation of the rate of interest. The classical theory of rate of interest has been criticized on the basis of the following shortcomings as discussed below: 1. Keynesian Theory of Interest. According to Keynes, interest is a monetary phenomenon and is determined by the demand for and the supply of money. 2. That meant an … ADVERTISEMENTS: The three theories of interest, i.e., the classical capital theory, the neoclassical loanable funds theory and the Keynesian liquidity preference theory, have been differentiated below: Difference # Classical Theory: 1. Keynes described his premise in “The General Theory of Employment, Interest, and Money.” Published in February 1936, it was revolutionary. Indeterminate Theory: Keynes has maintained that the classical theory is indeterminate in the sense that it fails to determine the interest rate. That is why Keynes characterised the classical theory of interest …   First, it argued that government spending was a critical factor driving aggregate demand. Keynesian economics. Keynes has developed a monetary theory of interest as opposed to the classical real theory of interest. The second major breakthrough of the 1930s, the theory of income determination, stemmed primarily from the work of John Maynard Keynes, who asked questions that in some sense had never been posed before.Keynes was interested in the level of national income and the volume of employment rather than in the equilibrium of the firm or the allocation of resources. It is the Keynesian theory of interest that recognises the important role of liquidity preference in the determination of the interest rate. So, for each income level a separate saving curve will have to be drawn. ADVERTISEMENTS: 3. According to Keynes, the rate of interest is purely "a monetary phenomenon." 2. His later celebrations of Keynesian Economics is an economic theory of total spending in the economy and its effects on output and inflation developed by John Maynard Keynes. Moreover, this behavior is not the outcome of a wrong‐headed propensity. 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