Interest Rates
Classical economics posited that interest rates would adjust to equate saving and investment, avoiding a pile-up of inventories (general overproduction). A rise in saving would cause a fall in interest rates, stimulating investment, hence always I=S. But Keynes argued that neither saving nor investment were very responsive to interest rates (i.e., that both were interest inelastic) so that large interest rate changes were needed. Further, it was the demand for and supplies of stocks of money that determined interest rates in the short run. Thus, saving could exceed investment for significant amounts of time, causing a general glut and a recession.
Read more about this topic: Saving
Famous quotes containing the words interest and/or rates:
“For that’s what a woman, a mother wants—to teach her children to take an interest in life. She knows it’s safer for them to be interested in other people’s happiness than to believe in their own.”
—Marguerite Duras (b. 1914)
“Good government cannot be found on the bargain-counter. We have seen samples of bargain-counter government in the past when low tax rates were secured by increasing the bonded debt for current expenses or refusing to keep our institutions up to the standard in repairs, extensions, equipment, and accommodations. I refuse, and the Republican Party refuses, to endorse that method of sham and shoddy economy.”
—Calvin Coolidge (1872–1933)