A developing country's government finances a large public infrastructure project by selling bonds to the public, which increases the overall demand for Loanable Funds. The central bank keeps the Money Supply fixed. According to the predictions of the Classical Theory of Rate of Interest and the Keynesian Liquidity Preference Theory of Rate of Interest, respectively, what is the impact on the Rate of Interest?

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Economics · Theories of Interest Rate

Verified Solution4 OptionsUpdated: October 2026👁️1 View

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Classical: Rises; Keynesian: Rises.

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Answer 1

Classical: Rises; Keynesian: Falls.

Answer 2

Classical: Rises; Keynesian: Rises.

Answer 3

Classical: Falls; Keynesian: Rises.

Answer 4

Classical: Remains unchanged; Keynesian: Rises.

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