Reconciling the Two Models of the Interest Rate

15A

In the liquidity preference model of the interest rate developed in Chapter 15, at the equilibrium interest rate the quantity of money demanded equals the quantity of money supplied. Yet, in the loanable funds model of the interest rate developed in Chapter 10, the equilibrium interest rate matches the quantity of loanable funds supplied by savers with the quantity of loanable funds demanded for investment spending. Can these two models of the interest rate be reconciled? Yes, they can. We will do this in two steps, focusing first on the short run and then on the long run.