Credit, Money & Aggregate Demand

This research critiques the article "Credit, Money, and Aggregate Demand," by Ben S. Bernanke and Alan S. Blinder.* In the article, the authors develop and test a variant to the IS/LM model (p. 435). The particular focus in the article is a change in the way bank loans are treated in analyses of the demand for money (p. 435).

In the early traditions of classical economic theory, the rate of interest was regarded simply as the rate of return on capital invested. At this time, interest, as income on capital, was considered to be analogous to rent on land.

As classical economic theory developed, however, the nature of interest, and the determinants of interest rates began to be perceived in more complex terms. Classical economic theory eventually held that interest rates were determined by forces affecting the supply of and demand for funds. The demand for funds was held by classical economic theory to derive from the expectations of business with respect to profits. In turn, the expectations of business with respect to profits were held to be a function of the marginal productivity of investment.

The supply of funds, on the other hand, was held by classical economic theory to be dependent upon the aggregate willingness in an economy to save. In turn, the aggregate willingness to save was held to be a function of the marginal rate of time preference for funds.

*Ben S. Bernanke and Alan S. Blinder, "Credit

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income increases, the level of savings tends to increase, even in the absence of interest rate increases, and vice versa. When real income increases, the increase in savings causes the savings schedule (loanable funds schedule) to shift to the right. Thus, according to Keynes' criticism, under the theory of interest as postulated in classical economics, it is not possible to know what the rate of interest will be, unless the real income level is known first. Conversely, it follows, according to this criticism, that the level of real income cannot be determined, unless the interest rate is known first. The reason for this latter problem is that a lower rate of interest, which follows a shift the right of the saving schedule cased by an increase in real income, also means a larger investment volume, which, in turn and in conjunction with the multiplier, causes yet a higher level of real income. Thus, according to the Keynes' criticism classical economic analysis cannot provide a solution to interest rate determination. Keynes postulated that the rate of interest is determined, instead, by the intersection of the supply schedule of money and the demand schedule for money. The Keynesian theory of interest, thus, was a monetary th
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Some common words found in the essay are:
Economic Review, Knut Wicksell, Alan Blinder*, loanable funds, classical economic, classical economic theory, economic theory, real income, keynesian theory, funds theory, loanable funds theory, saving schedule, theory keynesian, Federal Reserve, AGGREGATE DEMAND, theory keynesian theory, willingness save, rate return, economic theory keynesian, supply loanable funds, Money Aggregate, Credit Money, Aggregate Demand, Bernanke Alan,
Approximate Word count = 1836
Approximate Pages = 7 (250 words per page)

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