Loanable funds and liquidity preference; DeLong vs. Fama

Nick Rowe

"We live in an economy with monetary exchange (not barter). The very concept of "aggregate demand" only makes sense in a monetary economy, because it refers to the monetary demand for goods. To get an increased demand for goods, in terms of money, somewhere along the causal chain you need an excess supply of money. The initial excess demand for loans causes a rise in the rate of interest (loanable funds theory). The rise in the rate of interest causes an excess supply of money (liquidity preference theory). The excess supply of money is either spent, and so creates an increased demand for goods directly; or (more likely), is lent, and so creates an increased supply of loans and investment, and so creates an increased demand for goods indirectly."