introduction to macro economics section 6 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (a)

According to the classical view, the rate of interest is determined by the interaction of the supply of and demand for capital.

Thus this theory is popularly called the demand and supply theory of the rate of interest. The supply of money together with the liquidity preference curve in theory interact to determine the interest rate at which the quantity of money demanded equals the quantity of money supplied.

According to Keynes, interest is the price paid for surrendering their liquid assets. Greater the liquidity preference higher shall be the rate of interest. The liquidity preference constitutes the demand for money.