1) **Interest **is a payment made by a borrower for the use of a sum of money for a period of time.

2) **Three elements can be distinguished in interest:**

- **Payment for the risk involved in making the loan**

- **Payment for the trouble involved**

- **Pure interest, i.e. a payment for the use of money.**

**3) **J M Keynes in his book **“The General Theory of Employment, Interest and Money” **views that the rate of interest is purely **monetary phenomenon and is determined by Demand for money and supply of money.**

4) J M Keynes theory is known as **“Liquidity Preference Theory”**

5) Rate of interest and bond prices are **inversely related.**

6) Money Demand curve follows from above that quantity of **money demanded increases with the fall in the rate of interest or with the increase in level of nominal income**.

**7) **The rate of interest is determined **by demand for money (Liquidity Preference) and supply of money – JM Kenes.**

**8) **The position of money demand curve depends upon two factors: **1) The level of nominal income and 2) the expectation about the changes in bond prices in the future which implies change in rate of interest in future.**

9) IS and LM curves Theory promulgated by **Sir Hon Richard Hicks and Alvin Hansen.**

**10) **The IS curve and the LM curve relate the two variables **a) Income and b) the rate of interest. The intersection point of the two curves is the equilibrium rate of interest.**

11) LM= **Liquidity preference and Money supply equilibrium**. LM curve is derived from **Kenes Liquidity preference theory of interest.**

12) IS = **Classical Theory**

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