time preferences. This will result in a fall in the market rate of interest as banks will try to lure new borrowers with their excess money supply, but the natural rate remains the same as no additional supply of loanable funds have come from the public. Monetary equilibrium, Classics and Keynes The monetary-equilibrium framework is in some ways not at all different from the Classical model. The three central theories of the Classical School are Say's Law, Quantity theory of money and the role of interest rates. Say's Law (supply creates its own demand) implies that aggregate supply would always be equal to aggregate demand. The argument was that the sales of goods in the market produces the necessary income to buy that supply. This view was a part of the belief in Laissez-faire that government intervention is not required to prevent general shortages. Say's Law finds its most accurate expression in monetary equilibrium. In monetary-equilibrium, production is truly the source of demand but if there is an excess demand for money this does not happen as some potential productivity has not been translated into effective demand. If there is an excess supply of money then demand comes not only from previous production but also from the possession of the excess supply. The Quantity theory of money explained the general price level whereas other microeconomic factors explained relative prices. With relative prices being explained by resources and tastes, the possibilities of shortages excluded by Say's Law and Quantity theory of money being explained by the price level, the only missing factor was the intertemporal exchange. Example In the simplest model, income Y is made up of either Consumption (C) or Saving (S) while expenditure (Yi) were either on consumption or investment goods. Here, we ignore government and foreign trade. This can seen from equation 1. Now, if the preferences of the income earners shift towards the future resulting in a fall in C and increase in S as shown in equation 2. In the simple classical model increase in savings cause a fall in the interest rates thereby inducing additional investment expenditure. This increase in Investment (I) implies a fall in (C) on the expenditure side as shown in equation 3. As given Ci= Ce, the increase in investment is equal to the increase in savings and a shift in intertemporal preferences does not disrupt the equality between income and