S) the rate of interest will rise. This, among other reasons, led to the Great Depression. We are now living in welfare states. A part of the earned income is saved and is not automatically invested because saving and investment are done by two entirely different groups of people. They would resort to strikes. Keynes pointed out that it was possible for saving to exceed investment while the rate of interest was positive. Thus it is variations in income rather than in interest rate that bring the equality between saving and investment. Increased sales will necessitate the employment of more labour and ultimately full employment will be attained. When the DN and SN curves intersect at point E, the full employment level NF is determined at the equilibrium real wage rate W/P0. This is Keynes ‘liquidity trap’ which the classicists failed to analyse. In the classical analysis, output and employment in the economy are determined by the aggregate production function, demand for labour and supply of labour. It is by reducing the real wage rate that more workers can be employed. The higher the rate of interest, the higher the saving, and lower the investment. The classical economists believed that there was always full employment in the economy. So the economy will not achieve equilibrium at the full employment level shown at the point E where saving and investment are equal but at underemployment equilibrium level of the rate of interest Or, where saving exceeds investment. As pointed by Schumpeter. Mill, Marshall and Pigou. In the labour market, the demand for and supply of labour determine output and employment in the economy. MV is the/money supply curve which is a rectangular hyperbola. The equilibrium in the money market is shown by the equation MV = PT where MV is the supply of money and PT is the demand for money. Consequently, real wage cannot be labor Thus there is general deficiency of aggregate demand in relation to aggregate supply which leads to overproduction and unemployment in the economy. It is only when the wage is reduced to W/P0 that unemployment disappears and the level of full employment is attained. Such a possibility exists under a depression. Underemployment Equilibrium and the Waste of … He maintained that all income earned by the factor-owners would not be spent in buying products which they help to produce. On the contrary, the lower the rate of interest, the higher the demand for investment funds, and lowers the saving. ADVERTISEMENTS: Keynes did not elaborate how to secure fair employment. Be spent in buying products which they helped to produce employment is a hyperbola! The reduction of money ( V ) may slow down and not the... Bring full employment in an industry by reducing costs and increasing demand be reduced in order attain! 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