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Keynes' Theory of the Interest Rate: A Critical Approach

Katarzyna Appelt ()
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Katarzyna Appelt: University of Poznan

Theory Methodology Practice (TMP), 2016, vol. 12, issue 01, 3-8

Abstract: John M. Keynes – the author of General Theory of Employment, Interest and Money – assumed that the interest rate is the price which brings into equilibrium the desire to hold wealth in cash with the supply of cash resources, and the reward for parting with liquidity at the same time. He indicated liquidity preference as the key element of the theory of the demand for money, whereas the supply of money is a discretionary factor, i.e. depending on the policy pursued by monetary authorities. It has been proven that such an approach comes with at least three errors: inconsistency in defining the rate of interest, vicious circle in arguing and departure from the economics of value for functional adequacies.

Keywords: interest rate; liquidity preference; demand for money; classical school, Keynes (search for similar items in EconPapers)
JEL-codes: B41 B50 E43 (search for similar items in EconPapers)
Date: 2016
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