Question

In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will: increase. decrease. remain unchanged. either increase or decrease, depending on whether consumption is greater or less than investment.

Answer 1

Answer: The interest rate will either increase or decrease, depending on whether consumption is greater or less than investment.

Explanation:

An increase in savings will lead to an increase in investment expenditures through a reduction of the interest rate, and the economy will always return to the natural level of real GDP. The flexibility of the interest rate as well as other prices is the self‐adjusting mechanism of the classical theory that ensures that real GDP is always at its natural level. The flexibility of the interest rate keeps the money market, or the market for loanable funds, in equilibrium all the time and thus prevents real GDP from falling below its natural level.

Answer 2

Answer:

interest rate will either increased or decrease, depending on whether consumption is greater or less than the investment

Explanation:

Based on the scenario being discussed within the question, It can be said that if the demand if the demand for goods and services is less than the the supply, then the "interest rate will either increased or decrease, depending on whether consumption is greater or less than the investment". In the classical theory the equilibrium rate of interest was the one which will equal the supply of funds that are loanable, the origin of the loan, is from the household sector to the demand for loanable funds originated from what businesses and governments wish to borrow.