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:
“Parentage is a very important profession; but no test of fitness for it is ever imposed in the interest of children.”
—George Bernard Shaw (1856–1950)
“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)