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:
“A government deriving its energy from the will of the society, and operating, by the reason of its measures, on the understanding and interest of the society ... is the government for which philosophy has been searching and humanity been fighting from the most remote ages ... which it is the glory of America to have invented, and her unrivalled happiness to possess.”
—James Madison (1751–1836)
“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)