Question

In the Keynesian framework, determination of an equilibrium interest rate also implies 

(A) The rate that equates the supply of and the demand for bonds. 
(B) The rate that equates the supply of money with the demand for money. 
(C) The rate that equates the supply of money and demand for investment. 
(D) The rate that equates supply of labour and demand for labour. 
Choose the correct answer from the options given below:
 

• A. (C) only
• B. (C) and (D) only
• C. (A), (B) and (C) only
• D. (A), (B), (C) and (D)

Hint:

In the Keynesian framework, the equilibrium interest rate is determined by the supply of and demand for money, not labor or bonds.

Answer 1

The Correct Option is C

Step 1: Understand the Keynesian framework.
In the Keynesian economic framework, the equilibrium interest rate is determined by the interaction of the demand for and the supply of money in the economy. The interest rate is the price of borrowing money, which is influenced by the demand for money (for transactions, speculative purposes, etc.) and the supply of money (determined by the central bank).

Step 2: Analysis of options.
- (A) The rate that equates the supply of and the demand for bonds: This is incorrect. While bond prices and interest rates are inversely related, the equilibrium interest rate in the Keynesian framework specifically refers to the supply and demand for money, not bonds.
- (B) The rate that equates the supply of money with the demand for money: This is correct. In the Keynesian model, the equilibrium interest rate is determined by the supply of and the demand for money.
- (C) The rate that equates the supply of money and demand for investment: This is correct. While investment is influenced by the interest rate, it is more closely related to the demand for money and not a direct part of the supply-demand balance for interest rate determination.
- (D) The rate that equates supply of labour and demand for labour: This is incorrect. The supply and demand for labor determine wages, not the equilibrium interest rate.

Step 3: Conclusion.
The correct answer is (A), (B), and (C) only.