Compare and contrast the Loanable funds theory and Keynesian theory of interest rate determination.
Ans.
The two theories are reconciled by IS-Lm Model. The IS curve represents the Loanable Funds Id=Sd equilibrium condition, and the LM curve represents the [Liquidity Preference] Md=Ms equilibrium condition. But each is incomplete, because Y affects Sd (and maybe Id too), and Y also affects Md (and maybe Ms too). So you need to put both curves together to get the complete picture. The rate of interest (and the level of output Y) are co-determined by the IS (Loanable Funds) curve and the LM (Liquidity Preference) curve.
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