CH. 14 THE CLASSICAL THEORY OF INTEREST 181

amounts saved out of an income Y1 to various levelsof the rate of interest, the curves Y2, Y3, etc., beingthe corresponding curves for levels of income Y2, Y3 ,etc. Let us suppose that the curve Y1 is the Y-curveconsistent with an investment demand-schedule X1X1´and a rate of interest r1 . Now if the investmentdemand-schedule shifts from X1X1´ to X2X2´, incomewill, in general, shift also. But the above diagramdoes not contain enough data to tell us what its newvalue will be; and, therefore, not knowing which isthe appropriate Y-curve, we do not know at what pointthe new investment demand-schedule will cut it. If,however, we introduce the state of liquidity-preferenceand the quantity of money and these between them tellus that the rate of interest is r2 , then the whole positionbecomes determinate. For the Y-curve which inter-sects X2X2´ at the point vertically above r2, namely) thecurve Y2, will be the appropriate curve. Thus theX-curve and the Y-curves tell us nothing about the rateof interest. They only tell us what income will be,if from some other source we can say what the rate ofinterest is. If nothing has happened to the state ofliquidity-preference and the quantity of money, so thatthe rate of interest is unchanged, then the curve Y2´which intersects the new investment demand-schedulevertically below the point where the curve Y1 inter-sected the old investment demand-schedule will be theappropriate Y-curve, and Y2´ will be the new level ofincome.

Thus the functions used by the classical theory,namely, the response of investment and the response ofthe amount saved out of a given income to change inthe rate of interest, do not furnish material for a theoryof the rate of interest; but they could be used to tellus what the level of income will be, given (from someother source) the rate of interest; and, alternatively,what the rate of interest will have to be, if the level ofincome is to be maintained at a given figure (e.g . the