Answer to Question #285284 in Macroeconomics for Jordan

Question

How is interest rate determined by classical, Keynesian and hicksian school of thought

Answer 1

Solution:

Under the classical school of thought, the amount of savings and investment in an economy determines the interest rate. The interest rate adjusts so that the amount of money saved equals the amount of money invested.

 

Under the Keynesian school of thought, the rate of interest is determined by the demand for money and the supply of money.

 

Under the Hicksian school of thought, the rate of interest is determined by the IS-LM model. When money markets and the real economy are in balance, the intersection of the IS and LM curves represents the equilibrium point of interest rates and output.