Lecture 6 ECON 460
Tuesday, September 25, 2012
Chapter 13: The General Theory of the Rate of Interest I
What determines r?
What does classical theory say?
R equilibrates real investment and real saving; if they differ r adjusts; Keynes
said this isn’t correct and have to look at money market
Time-preference has two parts. What are they?
Decide whether to save or spend
Decide which form of saving- how liquid will it be
(Is “liquidity-preference” really a part of time-preference? Or is it a decision made
following a decision about time-preference?)
“Obvious” r is not the return to saving. Why?
Because you can save without getting a return;
r equates money stock with liquidity preference: M = L(r) ( “This is where, and how,
the quantity of money enters into the economic scheme.)
If r is positive, why ever hold money?
What is the relationship between r and bond prices? What are “bears” and “bulls”?
What are the transactions (T), precautionary (P) and speculative (S) motives for
T: people demand money to engage in transactions
With an organiz