The modern theory of Interest is certainly an improvement over the Keynesian theory of interest because it deals with both the real and monetary factors. His later celebrations of hoarding. It treats the interest rate as a purely monetary phenomenon and by neglecting the real factors makes the theory narrow and unrealistic. What Is Keynesian Economics? Keynesian theory was introduced with the book "The General Theory of Employment, Interest, and Money" The marginal propensity to consume is-the slope of the consumption function Incorrect-the change in consumption divided by the change in income. The Keynesian theory of interest is not only indeterminate, but is also an inadequate explanation of the determination of the rate of interest. So, the interest rate solely depends on the demand and supply of money. Keynesian Economics is an economic theory of total spending in the economy and its effects on output and inflation developed by John Maynard Keynes. Keynes’s theory and policy before the General Theory Cambridge Keynes was, from his first contributions, a monetary economist. The Keynesian theory only explains interest in the short-run. Keynesian economics, body of ideas set forth by John Maynard Keynes in his General Theory of Employment, Interest and Money (1935–36) and other works, intended to provide a theoretical basis for government full-employment policies. British economist John Maynard Keynes is the father of modern macroeconomics, developing his own school of economic thought. Keynes’s early-1900s economic theories had a huge impact on economic theory and the economic policies of global governments. It gives no clue to the rates of interest in the long run. 2. Keynes theory of interest, like the classical and loanable funds theories, is indeterminate. The interest rate according to Keynes is given for parting with liquidity for a particular period of time. Keynesian Economic Theory also prompts central and commercial banks to accumulate cash reserves off the back of interest rate hikes in order to prepare for future recessions. The Keynesian theory deals only with the monetary factors, not the real factors. Thus, in the money economy of the present world, the Keynesian theory is more realistic than the classical theory of interest. 6. This led John Maynard Keynes to write "The General Theory of Employment, Interest, and Money" in 1936, which played a large role in distinguishing … As such the modern theory of interest is much more comprehensive than the Keynesian theory of interest. Keynesian theory. It is important to highlight that Keynesian approach is superior to the classical hypothesis of interest since the former is troubled with equilibrium in the physical sector. During times of recession (or “bust” cycles), the theory prompts governments to lower interest rates in a bid to encourage borrowing. 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