The Criticism of The Classical Theory of Interest

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The Criticism of The Classical Theory of Interest

Published by: sadikshya

Published date: 06 Jul 2021

The Criticism of The Classical Theory of Interest in Grade 12

The Criticism of The Classical Theory of Interest

The criticism of the classical theory of interest is as follows.

  • Assumption of full employment.
  • Equality between saving and investment.
  • Saving and investment are not affected by interest rate only.
  • Monetary factors ignore.
  • The fixed income of level.
  • Neglects the credit.
  • Ignores consumption loans.

Assumption of full employment

The classical theory of interest is based upon the unrealistic assumption of full employment but in reality, we cannot find full employment is the real world.

Equality between saving and investment

According to classical theory equality between saving and investment is the function of investment rate. But J.M Keynes as the equilibrium between saving and investment is not made through the change in the level of income.

Saving and investment are not affected by interest rate only

This theory assumes that saving and investment are affected by the rate of interest, but saving is affected by the level of income and investment by the profit rate.

Monetary factors ignored

These theories ignore the monetary factors in the determination of the rate of interest. According to J.B. Keynes interest is the monetary phenomena interest is paid as a reward for sacrificing the comfort of liquidity or cash money.

The fixed income of level

This theory is based on the belief that the level of income remains constant but actually levels of income change with agreeing change in investment. Thus this theory is not correct.

Neglects the credit

Credit money also plays an important role in the supply of money. Therefore credit money should have a role in interest rate determination also, but this theory does not explain the effect of credit money in the supply of capital.

Ignores consumption loans

This theory assumptions that saving of capital is done only in the view of population and it is wrong. Thus the theory ignores the consumption loan.