Liquidity Preference and the Theory of Interest

In Chapter 10 we developed a theory of investment and found that, given (i) the marginal efficiency of capital schedule adjusted for borrowers’ risk; and (ii) the cost of borrowing, we could determine the equilibrium rate of real planned investment. Given the rate of real planned investment (determined in this way) we could then, from the schedule of the propensity to consume (itself derived from the consumption function) determine the equilibrium level of output and employment from the condition that, in equilibrium, planned saving must be equal to planned investment.