Theories of Interest
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Indian Economy and Indian Financial System — JAIIB.
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Free sample — 8 of 69 rapid-fire Q&A cards.
What are the three components hidden in every quoted interest rate?
Risk premium, service charge, pure interest (time-value of money).
How does Keynes' theory fundamentally differ from Classical interest theory?
Interest determined by money demand/supply, not saving and investment.
In Keynes' two-asset world, which asset earns interest but has price volatility?
Long-term bonds; prices move inversely with interest rates.
State the three motives for holding money in Keynesian theory.
Transactions, precautionary, speculative motives for liquidity preference.
What is the slope and logic of the Money Demand (LP) curve?
Downward-sloping; lower rates increase money holding as bonds yield less.
How does RBI money supply increase affect interest rates per Keynes?
Excess supply pushes rates down until public willing to hold larger stock.
What is the IS-LM model? Who created it?
Hicks-Hansen synthesis merging commodity (IS) and money market (LM) equilibrium.
Why is the IS curve downward-sloping?
Higher income increases saving, lowering equilibrium interest rate in commodity market.
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