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My name is Brendan Hanke and I attend the University of Puget Sound in Tacoma, Washington. I am currently studying abroad for a semester in Scotland and researching a paper on the Keynesian theory of the interest rate. I came across your page dedicated in his honor and wondered if you would be able to clear up a question I have regarding Keynes' view. Is it true that according to Keynes' view, an increase in the amount of saving will result in a decline of income? Correct me if I am wrong but am I right in supposing that Keynes' view of the interest rate states that this rate is not the "price" that equates the supply of loanable funds and the demand for these funds, but rather a rate which determines the liquidity preference of an investor.

Thank You for your time,

Brendan Hanke

-- Brendan Hawke (u02brh@abdn.ac.uk), April 13, 2000

Answers

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Yes, other things equal--and those other things inclued the stock of money, the price level, and the liqidity preference of businesses and households--an increase in the propensity to save lowers income and production. The increase in savings reduces consumption spending, and investment spending cannot rise to compensate unless or until something happens to reduce the interest rate...

The empirical relevance of this, however, is not clear in today's world where central banks act aggressively and are constantly adjusting interest rates to try to keep production equal to potential output.

Brad DeLong

-- Brad DeLong (delong@econ.berkeley.edu), April 13, 2000.