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Economics
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How is Keynes’ treatment of saving and the rate of interest different from the classicals’ treatment?

Oct 27th, 2014

Classical theory treated saving as a direct function of the rate of interest and investment as an inverse function.

In Keynesian theory, saving is a direct function of the level of income. The rate of interest may have an influence on saving, but it is of minor importance in the Keynesian scheme. In classical theory, the rate of interest is all important, and the level of income is of minor importance.Since the classical model argues that full employment is the normal state of affairs in the economy, the level of income is in effect ruled out as a variable in the short run, and so it is ruled out as an influence on the amount of saving. The problem in classical economics is to explain how saving will vary at the full-employment level of income, and the solution is provided by the rate of interest. The higher the rate of interest, the greater the amount of the full-employment income that is withheld from consumption or devoted to saving.

Reference:

http://www.compilerpress.ca/ElementalEconomics/211%20&%20214%20Micro%20&%20Macro/Shapiro%20Ch.%2017%20d.htm


Oct 27th, 2014

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