I was recently learning about the IS-LM Curve, and when I read about how increased Real GDP (Y) increases the demand for money in the economy, and therefore increases the rate of interest, I became curious if the demand for money actually did increase the pure rate of interest. Reading through Man Economy and State, I noticed Rothbard said that it did not affect the pure rate of interest. I then read an article on Mises.org (The demand for money and the time structure of production), and the conclusion was that the increased demand of money increased the pure rate of interest. So I have a few questions:
1) When it comes to the Keynesian LM relationship, is this relationship, and the reasoning, plausible?
2) Looking at time preference, and looking at the ratio between present and future goods, Murray says that when people add to their cash balances, the left over income still has the same proportion as before (ex. 100 oz income, with 20% saved means 80 Is consumed, 20 is saved, and if cash balances was increased by 20, 64 is consumed and 16 saved). The author of the article states that the pure rate of interest increases due to the fact that, since money is now more valuable in relation to the costs to produce it, that more capital and labor is pulled from other investment projects and put into money production (assuming commodity). So a couple of questions:
1) Aren’t cash balances present goods? If they were, wouldn’t it make sense that cash balances are only pulled from consumption, so that the pure rate of interest and rate of investment is the same in society?
2) Who is right here? Are they both wrong in their conclusions?