Saving - Interest Rates

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:

    There is a mortifying experience in particular, which does not fail to wreak itself also in the general history; I mean “the foolish face of praise,” the forced smile which we put on in company where we do not feel at ease, in answer to conversation which does not interest us. The muscles, not spontaneously moved but moved, by a low usurping wilfulness, grow tight about the outline of the face, with the most disagreeable sensation.
    Ralph Waldo Emerson (1803–1882)

    In the U.S. for instance, the value of a homemaker’s productive work has been imputed mostly when she was maimed or killed and insurance companies and/or the courts had to calculate the amount to pay her family in damages. Even at that, the rates were mostly pink collar and the big number was attributed to the husband’s pain and suffering.
    Gloria Steinem (20th century)