The Classical and Keynesian Approaches to Interest Rate Determination: A Theoretical Overview

Abstract

Interest rates play a pivotal role in shaping the economic environment. They determine the cost of borrowing and the return on savings and have significant effects on investment, consumption, and overall economic growth. The Classical and Keynesian schools of thought provide distinct approaches to understanding how interest rates are determined. The Classical theory emphasizes the interplay between savings and investment, while the Keynesian theory focuses on the influence of demand for money and supply of money. As a result, the purpose of this research is to compare both theories and analyze them from a theoretical perspective.