Classical Theory or Real Interest Rate Determination Theory: Regarding the nature of interest, classicists were not unanimous. They regarded the nature and the determinants of the rate of interest in terms of a more complex pattern. Some classical economists like A. Marshall, N. W. Senior, E. Bohm-Bawerk, I. Fisher, etc., viewed interest from the supply side of capital, i.e., savings. [...]
Let us make an in-depth study of the Classical Theory of the Interest Rate. In the classical system all the three concepts of aggregate domestic expenditure — consumption, investment and government expenditure — play an explicit role in determining the equilibrium interest rate. In truth, the interest rate ensures that exogenous changes in any component of aggregate demand do not [...]
The following points highlight the five criticisms against the classical theory of the rate of interest. The criticisms are: 1. Based on the Assumption of Full Employment 2. Ignores effect of Changes in Income Level 3. Wrongly Assumes Independence of Saving and Investment Demand Schedules 4. Savings out of Current Income not the only Source of Loanable Funds 5. Only [...]