| Sumario: | The great polemics of thirties between proponents of liquidity preference and loanable funds theories of interest have flared up again recently. Nevertheless, no general agreement seems to have been reached on the two main issues namely similarity in two theories and if they are not similar than which theory is correct. The purpose of the first two parts of this paper is to show that two theories are indeed identical in the sense that two sets of demand and supply functions, that is, the demand for and the supply of loanable funds, and the demand for money to hold and the stock of money in existence, would determine the same rate of interest in all circumstances, if both sets of demand and supply functions are formulated correctly in the ex ante sense. The third part shows that the reconciliation between loanable funds and liquidity preference theories of interest provides also a key for the reconciliation of the multiplier and velocity analyses of income expansion. To give a convincing demonstration of the equivalence of two theories, one must explain how the decision of any economic subject on how much to borrow or to lend necessarily implies a corresponding decision to hold money for one purpose or another.
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