The Rate of Interest

Abstract

The Classical economists held that the rate of interest was a price which brought into equilibrium the demand for investment funds and the supply of savings. These are two ‘real’ flows: investment represents the resources which firms wish to use for producing goods which will not be consumed currently by households; saving represents resources which households are prepared to devote for future, as opposed to current, consumption. Furthermore, since money was wanted only for transactions purposes and since the economy was always fully employed, the effect of any change in the supply of money was directly on the price level.