me fault as are the classical economic theory of interest and the Keynesian theory of interest·it cannot provide a solution to interest rate determination. The loanable funds supply varies with the level of disposable income. Thus, in order to know what the level of disposable income is, it is necessary to first know what the interest rate is, and vice versa.
When the Keynesian theory of interest and the loanable funds theory of interest are considered together, however, a theory of interest may be formulated which provides a means for the determination of interest rates. The loanable funds theory of interest provides a set of savings schedules which are related to a variety of income levels. The Keynesian theory of interest provides a family of investment-demand schedules which are also related to a variety of income levels. Together, these two sets of schedules, which are derived through the application of two different theories of interest, may be used to derive an investment-savings relationship, which, in turn, describes the functional relatio
...