Welcome to EconomicsDiscussion.net! the interest rates on foreign deposits. 2. 6. Investment, on the other hand, depends on the rate of interest and the level of income. 105 worth of goods a year from now. Thus S-I equality through adjustment in interest rate is ruled out. If interest rates are relatively high, your loan payments will be greater. In the lower Figure 8 (B), the point B corresponds to 5 per cent interest rate and Rs200crores income level. The theory is based on the assumption that the interest rate is flexible and varies with changes in LM or/and IS curves. The classical writers assumed perfect competition to prevail in the factor market; their contention was that a producer would hire capital up to the point at which the marginal cost (= price) of capital is equal to the marginal productivity of capital. Shifts or changes in the IS curve or the LM curve or in both change the equilibrium position and the rate of interest is determined accordingly. Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.. MMT is an alternative to mainstream macroeconomic theory. People are always expecting prices either to rise or to fall. This edition is the first time it has been available in more than half a century. If the investment demand schedule shifts upward, or the saving schedule shifts downward, the curve IS would shift to the right as IS1 curve. Saving can be obtained by the investors only if they are prepared to pay the savers a rate of interest high enough to overcome their time preference. The purchasing power parity theory A) has significant predictive power in the short run. As rate of interest rises, the savers are induced to save more; while the abstinence or time-preference of more people is covered, the number of people doing saving also increases. The theory states that there is a link between the nominal interest rates in two countries and the exchange rate between their currencies. These curves together with the perfectly inelastic money supply curve MQ give us the LM curve. income level, the L2Y2 and the QM curves equal at OR^ interest rate. Content Filtration 6. Given the IS curve, when the LM curve shifts to the right, income increases but the rate of interest falls. The supply of money, the liquidity preference, the level of income and the rate of interest provide data for the LM curve shown in Figure 9 (B). The Hicks-Hansen analysis is thus an integrated and determinate theory of interest in which the two determinates, the IS and LM curves, based on productivity, thrift, liquidity preference and the supply of money, all play their parts in the determination of the rate of interest. Distribution theory, in economics, the systematic attempt to account for the sharing of the national income among the owners of the factors of production—land, labour, and capital. C) both A and B of the above. According to this theory, the rate of interest is the price of credit, which is determined by the demand and supply for loanable funds. Real rate of interest = Market rate – expected rate of inflation. That is, it is the rate that will prevail in the market if the general price level remained stable. The four variables of the two formulations have been combined to construct two new curves, the IS curve representing flow variable of the loanable funds formulation (or the real factors of the classical theory) and the LM curve representing the stock variables of liquidity preference formulation. An investor was thus assumed to invest up to the point at which the marginal cost of borrowing—the rate of interest—is equal to the marginal productivity of the capital asset. Lasalle styled it as the Iron Law of Wages or the Brazen Law of Wages. The Hicks-Hansen analysis is thus an integrated and determinate theory of interest in which the two determinates, the IS and LM curves, based on productivity, thrift, liquidity preference and the supply of money, all play their parts in the determination of the rate … This dynamic has led to increasing attention to Modern Monetary Theory (MMT), presented as an alternative to the Other classical writers would emphasize time-preference as the primary consideration of savers. Self-determination theory (SDT) is a macro theory of human motivation and personality that concerns people's inherent growth tendencies and innate psychological needs.It is concerned with the motivation behind choices people make without external influence and interference. Other critics of formal mathematical equilibrium models stress the role of politics and institutions in economic affairs, often focusing on the inequality and dependency among persons, group… At the same time, borrowers will be willing to pay the premium because they will be repaying their loans with money worth 5 percent less per year than the money they borrowed. A family of liquidity preference curves LtY1, L2Y2 and L3Y3 is drawn at income levels of Rs100crores, Rs200crores and Rs300crores respectively in Figure 9 (A). Second, modern Quantity theorists When the former rate is higher than the latter rate (Y1B> Y1A), the businessmen will borrow at a lower rate from the money market and invest the borrowed funds at a higher rate in the capital market. This general equilibrium position persists at a point of time. Tire difference is a “deflation discount” (or negative inflation premium). It is a static theory that explains the short-run behaviour of the economy. 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