According to Keynes, business cycle is caused by variations in the rate of investment caused by fluctuations in the Marginal Efficiency of Capital. The term 'marginal efficiency of capital' means the expected profits from new investments. Entrepreneurial activity depends upon profit expectations. In his business cycle theory, Keynes assigns the major role to expectations. Business cycles are periodic fluctuations of [...]
Keynes' Liquidity Preference Theory of Interest Rate Determination! The determinants of the equilibrium interest rate in the classical model are the 'real' factors of the supply of saving and the demand for investment. On the other hand, in the Keynesian analysis, determinants of the interest rate are the 'monetary’ factors alone. Keynes' analysis concentrates on the demand for and supply [...]
Saving-Investment Controversy: To understand Keynesian income determination theory, concepts of saving and investment are to be spelt out categorically. This is because one encounters conflicting statements relating to saving and investment. One statement says that saving and investment are always equal. Another statement says that saving and investment are equal only at the equilibrium level of income. This apparent contradiction [...]