{"id":246615,"date":"2026-07-01T13:22:22","date_gmt":"2026-07-01T07:52:22","guid":{"rendered":"https:\/\/www.oliveboard.in\/blog\/?p=246615"},"modified":"2026-07-01T13:22:28","modified_gmt":"2026-07-01T07:52:28","slug":"jaiib-ie-ifs-theories-of-interest","status":"publish","type":"post","link":"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/","title":{"rendered":"Attempt JAIIB IE &amp; IFS Theories of Interest Quiz &amp; Download PDF"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_77 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of content<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#What_are_the_theories_of_interest_in_JAIIB_IE_IFS\" >What are the theories of interest in JAIIB IE &amp; IFS?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#Download_Practice_Quiz_on_Theories_of_Interest\" >Download Practice Quiz on Theories of Interest<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#Attempt_Quiz_on_JAIIB_IE_IFS_Theories_of_Interest\" >Attempt Quiz on JAIIB IE &amp; IFS Theories of Interest<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#Sign_Up\" >Sign Up<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#Login\" >Login<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#Forgot_Password\" >Forgot Password<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#i\" >&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#What_is_meant_by_the_rate_of_interest\" >What is meant by the rate of interest?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#What_is_the_Classical_Theory_of_Interest\" >What is the Classical Theory of Interest?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#How_is_the_demand_for_savings_explained_in_the_Classical_Theory\" >How is the demand for savings explained in the Classical Theory?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#What_determines_the_supply_of_savings\" >What determines the supply of savings?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#Why_was_the_Classical_Theory_criticised\" >Why was the Classical Theory criticised?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#What_is_Keynes_Liquidity_Preference_Theory\" >What is Keynes&#8217; Liquidity Preference Theory?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#Why_do_people_demand_money_according_to_Keynes\" >Why do people demand money according to Keynes?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#What_is_the_relationship_between_bond_prices_and_interest_rates\" >What is the relationship between bond prices and interest rates?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#How_is_the_equilibrium_rate_of_interest_determined_in_Keynes_Theory\" >How is the equilibrium rate of interest determined in Keynes&#8217; Theory?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-17\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#What_is_the_Hicks-Hansen_IS-LM_Model\" >What is the Hicks-Hansen IS-LM Model?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-18\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#What_do_the_IS_and_LM_curves_represent\" >What do the IS and LM curves represent?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-19\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#How_does_fiscal_policy_affect_the_IS-LM_model\" >How does fiscal policy affect the IS-LM model?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-20\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#How_does_monetary_policy_affect_the_IS-LM_model\" >How does monetary policy affect the IS-LM model?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-21\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/#FAQs\" >FAQs<\/a><\/li><\/ul><\/nav><\/div>\n\n<p>Preparing for the JAIIB IE &amp; IFS exam requires a strong understanding of economic concepts, and Theories of Interest is one of the most important as well as challenging topics in Module B. This chapter covers different approaches to the determination of the rate of interest, including the Classical Theory, Keynes&#8217; Liquidity Preference Theory, and the Hicks-Hansen IS-LM Model. Many candidates find these concepts difficult because they involve both real and monetary factors along with graphical analysis. In this blog, we have provided all the details about the important concepts of Theories of Interest and download a PDF for revision and practice.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-are-the-theories-of-interest-in-jaiib-ie-amp-ifs\"><span class=\"ez-toc-section\" id=\"What_are_the_theories_of_interest_in_JAIIB_IE_IFS\"><\/span>What are the theories of interest in JAIIB IE &amp; IFS?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Theories of Interest explain how the rate of interest is determined in an economy. Different economists have provided different explanations based on savings, investment, demand for money, and supply of money. The JAIIB syllabus mainly covers three major theories that every banking aspirant should understand clearly before attempting the examination.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Theory<\/strong><\/td><td><strong>Main Idea<\/strong><\/td><td><strong>Rate of Interest Depends On<\/strong><\/td><\/tr><tr><td>Classical Theory<\/td><td>Real factors determine interest<\/td><td>Savings and Investment<\/td><\/tr><tr><td>Keynes&#8217; Theory<\/td><td>Monetary factors determine interest<\/td><td>Demand for Money and Supply of Money<\/td><\/tr><tr><td>Hicks-Hansen Theory<\/td><td>Combines both approaches<\/td><td>Savings, Investment, Money Demand and Money Supply<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-16018d1d wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.oliveboard.in\/jaiib-mock-test\/?ref=contac-jieifs-ti-pq\" target=\"_blank\" rel=\"noreferrer noopener\">Attempt A free JAIIB Mock Test Now!<\/a><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Download_Practice_Quiz_on_Theories_of_Interest\"><\/span>Download Practice Quiz on Theories of Interest<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Strengthen your JAIIB IE &amp; IFS preparation with a dedicated Theories of Interest Practice Quiz PDF. It covers important topics such as the Classical Theory of Interest, Keynes&#8217; Liquidity Preference Theory, Hicks-Hansen IS-LM Model, demand and supply of money, savings and investment, fiscal policy, monetary policy, and equilibrium rate of interest.<\/p>\n\n\n\n<p class=\"has-text-align-center has-medium-font-size\"><strong><a href=\"https:\/\/www.oliveboard.in\/jaiib-ie-and-ifs-topic-wise-practice-quiz-pdf\/?ref=contac-jieifs-ti-pq\" target=\"_blank\" rel=\"noreferrer noopener\">Download PDF<\/a><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Attempt_Quiz_on_JAIIB_IE_IFS_Theories_of_Interest\"><\/span>Attempt Quiz on JAIIB IE &amp; IFS Theories of Interest<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Evaluate your understanding of Theories of Interest with this topic-wise practice quiz. The MCQs cover Classical Theory, Keynes&#8217; Theory, IS-LM Model, liquidity preference, money demand and supply, interest rate determination, and other frequently asked JAIIB IE &amp; IFS concepts.<\/p>\n\n\n\n<!DOCTYPE html>\n<html lang=\"en\">\n<head>\n<meta charset=\"UTF-8\">\n<link rel=\"stylesheet\" href=\"https:\/\/courses.oliveboard.in\/edge\/css\/login-modal-for-blog.css\">\n\n<style>\n#quiz-1-sticky-header {\n  position: sticky;\n  top: 0;\n  z-index: 100;\n  background: #1565c0;\n  color: #fff;\n  padding: 12px 20px;\n  border-radius: 10px 10px 0 0;\n  display: flex;\n  justify-content: space-between;\n  align-items: center;\n  font-size: 16px;\n  font-weight: bold;\n  box-shadow: 0 2px 8px rgba(0,0,0,0.2);\n  margin: -20px -20px 20px -20px;\n}\n\n#quiz-1-score-badge {\n  background: rgba(255,255,255,0.2);\n  padding: 4px 12px;\n  border-radius: 20px;\n  font-size: 15px;\n  white-space: nowrap;\n}\n#quiz-1 * { box-sizing: border-box; }\n\n#quiz-1 .quiz-container {\n  max-width: 700px;\n  margin: auto;\n  padding: 20px;\n  background: #fff;\n  border-radius: 14px;\n  box-shadow: 0 6px 16px rgba(0,0,0,0.12);\n}\n\n#quiz-1 h2 {\n  text-align: center;\n}\n\n#quiz-1 .question {\n  margin-bottom: 22px;\n}\n\n#quiz-1 .question p {\n  font-weight: bold;\n}\n\n#quiz-1 button {\n  width: 100%;\n  padding: 12px;\n  margin: 6px 0;\n  border: none;\n  border-radius: 6px;\n  background: #e0e0e0;\n  color: #000;\n  font-size: 16px;\n  cursor: pointer;\n}\n\n#quiz-1 button:hover {\n  background: #d5d5d5;\n}\n\n#quiz-1 button.correct {\n  background: #4caf50;\n  color: #000;\n}\n\n#quiz-1 button.wrong {\n  background: #f44336;\n  color: #000;\n}\n\n#quiz-1 button.locked {\n  pointer-events: none;\n}\n\n\/* SUMMARY *\/\n#quiz-1 .final-summary {\n  margin-top: 40px;\n  padding: 20px;\n  border-radius: 14px;\n  background: #fafafa;\n  border: 2px solid #4caf50;\n}\n\n#quiz-1 .final-summary h3 {\n  text-align: center;\n  margin-bottom: 20px;\n}\n\n#quiz-1 .summary-row {\n  display: grid;\n  grid-template-columns: 120px 1fr 40px;\n  gap: 10px;\n  align-items: center;\n  margin-bottom: 12px;\n  font-weight: bold;\n}\n\n#quiz-1 .summary-bar {\n  height: 14px;\n  background: #ddd;\n  border-radius: 10px;\n  overflow: hidden;\n}\n\n#quiz-1 .bar-fill {\n  height: 100%;\n  width: 0%;\n}\n\n#quiz-1 .bar-attempted { background: #2196f3; }\n#quiz-1 .bar-correct { background: #4caf50; }\n#quiz-1 .bar-wrong { background: #f44336; }\n#quiz-1 .bar-unattempted { background: #9e9e9e; width: 100%; }\n\n#quiz-1 .final-score {\n  text-align: center;\n  font-size: 22px;\n  margin-top: 20px;\n}\n\n#quiz-1 .score-value {\n  font-size: 30px;\n  margin-left: 8px;\n}\n<\/style>\n<\/head>\n\n<body>\n<div id=\"quiz-1\">\n  <div class=\"quiz-container\">\n<div id=\"quiz-1-sticky-header\">\n  <span> Practice JAIIB IE and IFS Quiz on Theories of Interest <\/span>\n  <span id=\"quiz-1-score-badge\">Score: <strong id=\"quiz-1-score-value\">0.00<\/strong><\/span>\n<\/div>\n\n    <!-- QUESTIONS -->\n\n<div class=\"question\" data-answered=\"false\">\n  <p>1. Which of the following is NOT an alternative name used for the Classical Theory of Interest?<\/p>\n  <button data-correct=\"false\">Demand and Supply Theory<\/button>\n  <button data-correct=\"true\">Liquidity Preference Theory<\/button>\n  <button data-correct=\"false\">Real Theory of Interest<\/button>\n  <button data-correct=\"false\">Saving-Investment Theory<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>2. Which group of economists is most closely associated with propounding the Classical Theory of Interest?<\/p>\n  <button data-correct=\"false\">Keynes, Hicks and Hansen<\/button>\n  <button data-correct=\"false\">Samuelson, Solow and Tobin<\/button>\n  <button data-correct=\"false\">Wicksell, Robertson and Ohlin<\/button>\n  <button data-correct=\"true\">Marshall, Fisher and Pigou<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>3. As per the Classical Theory, the rate of interest is determined by the equilibrium of:<\/p>\n  <button data-correct=\"false\">Government&#8217;s fiscal deficit<\/button>\n  <button data-correct=\"false\">Central bank&#8217;s policy rate alone<\/button>\n  <button data-correct=\"true\">Demand for and supply of savings<\/button>\n  <button data-correct=\"false\">Demand for and supply of money<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>4. In the framework describing the three elements of an interest payment on a loan, which of the following is NOT one of them?<\/p>\n  <button data-correct=\"false\">Payment for the trouble involved<\/button>\n  <button data-correct=\"false\">Pure interest for the use of money<\/button>\n  <button data-correct=\"true\">Payment for compensating expected inflation<\/button>\n  <button data-correct=\"false\">Payment for the risk involved in making the loan<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>5. &#8216;Pure interest&#8217;, in the classical sense, is determined by:<\/p>\n  <button data-correct=\"true\">The demand to borrow in relation to the supply of loanable funds<\/button>\n  <button data-correct=\"false\">The country&#8217;s repo rate fixed by the central bank<\/button>\n  <button data-correct=\"false\">Government bond yields alone<\/button>\n  <button data-correct=\"false\">Movements in the foreign exchange rate<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>6. Under the Classical Theory, the demand for savings (i.e., demand for capital\/investment) primarily originates from:<\/p>\n  <button data-correct=\"true\">Investors seeking to invest in business activities<\/button>\n  <button data-correct=\"false\">Households wanting to hoard idle cash balances<\/button>\n  <button data-correct=\"false\">The central bank&#8217;s open market operations<\/button>\n  <button data-correct=\"false\">Foreign portfolio investment flows<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>7. According to the Classical Theory, the demand for capital (investment) depends mainly on:<\/p>\n  <button data-correct=\"false\">The exchange rate regime followed by the country<\/button>\n  <button data-correct=\"false\">The current account balance of payments<\/button>\n  <button data-correct=\"true\">The marginal productivity of capital and the prevailing rate of interest<\/button>\n  <button data-correct=\"false\">The level of government subsidies alone<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>8. As per classical reasoning, when the quantum of investment increases progressively, the marginal productivity of capital tends to:<\/p>\n  <button data-correct=\"false\">Remain constant at all levels<\/button>\n  <button data-correct=\"false\">Become negative immediately<\/button>\n  <button data-correct=\"true\">Decrease<\/button>\n  <button data-correct=\"false\">Increase continuously without limit<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>9. Under the Classical Theory, borrowers will undertake investment (borrowing) only when:<\/p>\n  <button data-correct=\"true\">The rate of interest is lower than the productivity\/return on investment<\/button>\n  <button data-correct=\"false\">The rate of interest exceeds the expected return on investment<\/button>\n  <button data-correct=\"false\">The money supply is completely fixed<\/button>\n  <button data-correct=\"false\">Inflation in the economy is exactly zero<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>10. In the Classical framework, the supply of savings depends on all of the following EXCEPT:<\/p>\n  <button data-correct=\"false\">Psychological and economic factors influencing savers<\/button>\n  <button data-correct=\"false\">People&#8217;s capacity to save<\/button>\n  <button data-correct=\"false\">People&#8217;s willingness (patience) to save<\/button>\n  <button data-correct=\"true\">The cash reserve ratio fixed by the central bank<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>11. In classical economics, the act of saving essentially represents:<\/p>\n  <button data-correct=\"false\">Immediate expenditure by the government<\/button>\n  <button data-correct=\"false\">A purely speculative activity in the bond market<\/button>\n  <button data-correct=\"false\">Holding of currency purely out of precaution<\/button>\n  <button data-correct=\"true\">Postponement of present consumption in favour of future consumption<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>12. As per Classical Theory, when the level of income in the economy rises, the supply of savings tends to:<\/p>\n  <button data-correct=\"false\">Fall to zero regardless of income level<\/button>\n  <button data-correct=\"true\">Increase, accompanied by a rise in the rate of interest<\/button>\n  <button data-correct=\"false\">Decrease, accompanied by a fall in the rate of interest<\/button>\n  <button data-correct=\"false\">Remain entirely unaffected by income changes<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>13. Under the Classical Theory, a rise in the rate of interest is expected to cause:<\/p>\n  <button data-correct=\"false\">A fall in both the supply of and demand for savings<\/button>\n  <button data-correct=\"false\">A rise in both the supply of and demand for savings<\/button>\n  <button data-correct=\"false\">No change at all in either supply of or demand for savings<\/button>\n  <button data-correct=\"true\">A rise in the supply of savings and a fall in the demand for savings (investment)<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>14. The equilibrium rate of interest, as defined under the Classical Theory, is the rate at which:<\/p>\n  <button data-correct=\"true\">Demand for savings equals the supply of savings<\/button>\n  <button data-correct=\"false\">Demand for money equals the supply of money<\/button>\n  <button data-correct=\"false\">A country&#8217;s exports equal its imports<\/button>\n  <button data-correct=\"false\">Government revenue equals government expenditure<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>15. Which of the following statements correctly reflects the Classical view on the equilibrium interest rate across different income levels?<\/p>\n  <button data-correct=\"true\">The equilibrium rate of interest differs at each level of income<\/button>\n  <button data-correct=\"false\">The equilibrium rate of interest is identical at every level of income<\/button>\n  <button data-correct=\"false\">The equilibrium rate of interest is fixed solely by the central bank<\/button>\n  <button data-correct=\"false\">The equilibrium rate of interest has no relation to the level of income<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>16. Keynes&#8217;s principal criticism of the Classical Theory of Interest was that:<\/p>\n  <button data-correct=\"false\">Interest has absolutely no connection with money at all<\/button>\n  <button data-correct=\"false\">Savings and investment are always automatically equal by definition<\/button>\n  <button data-correct=\"false\">Classical economists completely ignored the existence of banks<\/button>\n  <button data-correct=\"true\">Interest is a purely monetary phenomenon, not simply a reward for saving<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>17. According to Keynes, the level of investment in an economy is primarily governed by:<\/p>\n  <button data-correct=\"false\">The rate of direct taxation imposed by the government<\/button>\n  <button data-correct=\"false\">The general willingness of households to save<\/button>\n  <button data-correct=\"false\">Adherence of the currency to the gold standard<\/button>\n  <button data-correct=\"true\">The marginal efficiency of capital and business expectations about the future<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>18. As per Keynes, savings in an economy are determined mainly by:<\/p>\n  <button data-correct=\"false\">The exchange rate of the domestic currency<\/button>\n  <button data-correct=\"false\">The statutory liquidity ratio maintained by banks<\/button>\n  <button data-correct=\"true\">The level of national income<\/button>\n  <button data-correct=\"false\">The prevailing rate of interest<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>19. Keynes&#8217;s theory of interest, presented in &#8220;The General Theory of Employment, Interest and Money&#8221;, is also known as the:<\/p>\n  <button data-correct=\"false\">Loanable Funds Theory<\/button>\n  <button data-correct=\"false\">Real Theory of Interest<\/button>\n  <button data-correct=\"false\">Classical Theory of Interest<\/button>\n  <button data-correct=\"true\">Liquidity Preference Theory<\/button>\n<\/div>\n\n<div class=\"question\" data-answered=\"false\">\n  <p>20. As per Keynes, the demand for money arises from all of the following motives EXCEPT the:<\/p>\n  <button data-correct=\"false\">Speculative motive<\/button>\n  <button data-correct=\"true\">Production motive<\/button>\n  <button data-correct=\"false\">Transaction motive<\/button>\n  <button data-correct=\"false\">Precautionary motive<\/button>\n<\/div>\n\n    <!-- FINAL SUMMARY -->\n    <div class=\"final-summary\">\n      <h3>Quiz Summary <\/h3>\n\n      <div class=\"summary-row\">\n        <span>Attempted<\/span>\n        <div class=\"summary-bar\"><div class=\"bar-fill bar-attempted\" data-summary=\"attempted\"><\/div><\/div>\n        <span data-count=\"attempted\">0<\/span>\n      <\/div>\n\n      <div class=\"summary-row\">\n        <span>Correct<\/span>\n        <div class=\"summary-bar\"><div class=\"bar-fill bar-correct\" data-summary=\"correct\"><\/div><\/div>\n        <span data-count=\"correct\">0<\/span>\n      <\/div>\n\n      <div class=\"summary-row\">\n        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It acts as a reward for giving up the present use of money for future benefits. In economics, understanding how this rate is determined helps explain investment decisions, borrowing behaviour, and monetary policy.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Interest is paid on borrowed money.<\/li>\n\n\n\n<li>It is one of the four major factor incomes.<\/li>\n\n\n\n<li>It is also the return earned on investments.<\/li>\n\n\n\n<li>The market rate of interest changes based on economic conditions.<\/li>\n\n\n\n<li>Different economic theories explain how this rate is determined.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-the-classical-theory-of-interest\"><span class=\"ez-toc-section\" id=\"What_is_the_Classical_Theory_of_Interest\"><\/span>What is the Classical Theory of Interest?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The Classical Theory is also known as the <strong>Saving-Investment Theory<\/strong> or <strong>Real Theory of Interest<\/strong>. According to classical economists, the rate of interest is determined by the equilibrium between savings and investment. It assumes that people save part of their income, while businesses demand these savings for investment.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Factor<\/strong><\/td><td><strong>Explanation<\/strong><\/td><\/tr><tr><td>Supply of Funds<\/td><td>Comes from household savings<\/td><\/tr><tr><td>Demand for Funds<\/td><td>Comes from business investment<\/td><\/tr><tr><td>Equilibrium<\/td><td>Savings = Investment<\/td><\/tr><tr><td>Nature<\/td><td>Real factor theory<\/td><\/tr><tr><td>Alternative Names<\/td><td>Saving-Investment Theory, Capital Theory<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-is-the-demand-for-savings-explained-in-the-classical-theory\"><span class=\"ez-toc-section\" id=\"How_is_the_demand_for_savings_explained_in_the_Classical_Theory\"><\/span>How is the demand for savings explained in the Classical Theory?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Businesses borrow money to invest in productive activities. They compare the expected return on investment with the cost of borrowing. If borrowing costs are low and returns are high, investment demand increases. As interest rates rise, businesses borrow less because the cost becomes higher.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Expected return on investment<\/li>\n\n\n\n<li>Marginal productivity of capital<\/li>\n\n\n\n<li>Cost of borrowing<\/li>\n\n\n\n<li>Business expectations<\/li>\n\n\n\n<li>Prevailing rate of interest<\/li>\n<\/ul>\n\n\n\n<p><strong>Also: Check out the detailed <a href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-syllabus\/?ref=contac-jieifs-ti-pq\" target=\"_blank\" rel=\"noreferrer noopener\">JAIIB IE and IFS Syllabus<\/a><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-determines-the-supply-of-savings\"><span class=\"ez-toc-section\" id=\"What_determines_the_supply_of_savings\"><\/span>What determines the supply of savings?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The supply of savings depends on people&#8217;s willingness and ability to save. Individuals postpone present consumption to save for future needs. Higher income generally increases the amount people can save, while personal habits and financial goals also influence savings.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Income level<\/li>\n\n\n\n<li>Capacity to save<\/li>\n\n\n\n<li>Willingness to save<\/li>\n\n\n\n<li>Patience for future consumption<\/li>\n\n\n\n<li>Economic and psychological factors<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-why-was-the-classical-theory-criticised\"><span class=\"ez-toc-section\" id=\"Why_was_the_Classical_Theory_criticised\"><\/span>Why was the Classical Theory criticised?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Although the Classical Theory explains interest through savings and investment, economists pointed out several limitations. The biggest criticism was that it ignored the important role played by money in determining the interest rate.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Limitation<\/strong><\/td><td><strong>Explanation<\/strong><\/td><\/tr><tr><td>Ignores money market<\/td><td>Does not consider money demand and supply<\/td><\/tr><tr><td>Savings not highly interest-sensitive<\/td><td>Income affects savings more than interest<\/td><\/tr><tr><td>Investment depends on expectations<\/td><td>Future business outlook also matters<\/td><\/tr><tr><td>One-sided approach<\/td><td>Focuses only on real factors<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-keynes-liquidity-preference-theory\"><span class=\"ez-toc-section\" id=\"What_is_Keynes_Liquidity_Preference_Theory\"><\/span>What is Keynes&#8217; Liquidity Preference Theory?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>John Maynard Keynes introduced the Liquidity Preference Theory in his famous book The General Theory of Employment, Interest and Money. According to Keynes, the rate of interest is determined by the demand for money and the supply of money. Therefore, interest is considered a monetary phenomenon instead of a real phenomenon.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Component<\/strong><\/td><td><strong>Explanation<\/strong><\/td><\/tr><tr><td>Demand for Money<\/td><td>People want to hold cash<\/td><\/tr><tr><td>Supply of Money<\/td><td>Controlled mainly by the central bank<\/td><\/tr><tr><td>Interest Rate<\/td><td>Determined where money demand equals money supply<\/td><\/tr><tr><td>Nature<\/td><td>Monetary theory<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-16018d1d wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.oliveboard.in\/jaiib\/?ref=contac-jieifs-ti-pq\" target=\"_blank\" rel=\"noreferrer noopener\">Join the JAIIB Online Course now<\/a><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-why-do-people-demand-money-according-to-keynes\"><span class=\"ez-toc-section\" id=\"Why_do_people_demand_money_according_to_Keynes\"><\/span>Why do people demand money according to Keynes?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Keynes explained that people hold money for different reasons. These reasons are called motives for holding money. Understanding these motives is very important for JAIIB examinations.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Motive<\/strong><\/td><td><strong>Purpose<\/strong><\/td><\/tr><tr><td>Transaction Motive<\/td><td>Daily expenses and business payments<\/td><\/tr><tr><td>Precautionary Motive<\/td><td>Future emergencies and unexpected expenses<\/td><\/tr><tr><td>Speculative Motive<\/td><td>To earn better returns in future investments<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-the-relationship-between-bond-prices-and-interest-rates\"><span class=\"ez-toc-section\" id=\"What_is_the_relationship_between_bond_prices_and_interest_rates\"><\/span>What is the relationship between bond prices and interest rates?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Bond prices and interest rates always move in opposite directions. This inverse relationship is frequently tested in banking examinations and forms the basis of Keynes&#8217; speculative demand for money.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Higher interest rate \u2192 Lower bond price<\/li>\n\n\n\n<li>Lower interest rate \u2192 Higher bond price<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Interest Rate<\/strong><\/td><td><strong>Bond Price<\/strong><\/td><\/tr><tr><td>Increases<\/td><td>Falls<\/td><\/tr><tr><td>Decreases<\/td><td>Rises<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>Also Check: <a href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-and-ifs-study-material\/?ref=contac-jieifs-ti-pq\" target=\"_blank\" rel=\"noreferrer noopener\">JAIIB IE and IFS Study Material<\/a><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-is-the-equilibrium-rate-of-interest-determined-in-keynes-theory\"><span class=\"ez-toc-section\" id=\"How_is_the_equilibrium_rate_of_interest_determined_in_Keynes_Theory\"><\/span>How is the equilibrium rate of interest determined in Keynes&#8217; Theory?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>According to Keynes, equilibrium is achieved when the demand for money becomes equal to the supply of money. At this point, the economy reaches its equilibrium interest rate.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Money demand curve slopes downward.<\/li>\n\n\n\n<li>Money supply curve is generally vertical.<\/li>\n\n\n\n<li>Their intersection determines the equilibrium interest rate.<\/li>\n\n\n\n<li>The central bank influences money supply through monetary policy.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-the-hicks-hansen-is-lm-model\"><span class=\"ez-toc-section\" id=\"What_is_the_Hicks-Hansen_IS-LM_Model\"><\/span>What is the Hicks-Hansen IS-LM Model?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The Hicks-Hansen Model combines the Classical Theory and Keynes&#8217; Theory into one framework. It explains that both real factors and monetary factors jointly determine the equilibrium rate of interest and national income.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Curve<\/strong><\/td><td><strong>Represents<\/strong><\/td><\/tr><tr><td>IS Curve<\/td><td>Savings and Investment Equilibrium<\/td><\/tr><tr><td>LM Curve<\/td><td>Money Demand and Money Supply Equilibrium<\/td><\/tr><tr><td>Intersection<\/td><td>Equilibrium Interest Rate and Income<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-16018d1d wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.oliveboard.in\/jaiib-previous-year-papers\/?ref=contac-jieifs-ti-pq\" target=\"_blank\" rel=\"noreferrer noopener\">Attempt JAIIB Previous Year Papers Today!<\/a><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-do-the-is-and-lm-curves-represent\"><span class=\"ez-toc-section\" id=\"What_do_the_IS_and_LM_curves_represent\"><\/span>What do the IS and LM curves represent?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The IS curve represents equilibrium in the goods market, while the LM curve represents equilibrium in the money market. Their intersection gives the economy&#8217;s overall equilibrium.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>IS Curve<\/strong><\/td><td><strong>LM Curve<\/strong><\/td><\/tr><tr><td>Downward sloping<\/td><td>Upward sloping<\/td><\/tr><tr><td>Goods Market<\/td><td>Money Market<\/td><\/tr><tr><td>Savings = Investment<\/td><td>Money Demand = Money Supply<\/td><\/tr><tr><td>Real Factors<\/td><td>Monetary Factors<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-does-fiscal-policy-affect-the-is-lm-model\"><span class=\"ez-toc-section\" id=\"How_does_fiscal_policy_affect_the_IS-LM_model\"><\/span>How does fiscal policy affect the IS-LM model?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Government spending and taxation mainly affect the IS curve. Expansionary fiscal policy increases income and interest rates, whereas contractionary fiscal policy reduces both.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Policy<\/strong><\/td><td><strong>IS Curve<\/strong><\/td><td><strong>Interest Rate<\/strong><\/td><td><strong>Income<\/strong><\/td><\/tr><tr><td>Expansionary<\/td><td>Right Shift<\/td><td>Increases<\/td><td>Increases<\/td><\/tr><tr><td>Contractionary<\/td><td>Left Shift<\/td><td>Decreases<\/td><td>Decreases<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>Also Check: <a href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-and-ifs-module-wise-study-guide\/?ref=contac-jieifs-ti-pq\" target=\"_blank\" rel=\"noreferrer noopener\">JAIIB IE and IFS Mind Map PDF<\/a><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-does-monetary-policy-affect-the-is-lm-model\"><span class=\"ez-toc-section\" id=\"How_does_monetary_policy_affect_the_IS-LM_model\"><\/span>How does monetary policy affect the IS-LM model?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Monetary policy mainly shifts the LM curve. When the central bank increases money supply, interest rates fall and investment rises. When money supply decreases, borrowing becomes costly and economic activity slows down.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Policy<\/strong><\/td><td><strong>LM Curve<\/strong><\/td><td><strong>Interest Rate<\/strong><\/td><td><strong>Income<\/strong><\/td><\/tr><tr><td>Expansionary<\/td><td>Right Shift<\/td><td>Falls<\/td><td>Rises<\/td><\/tr><tr><td>Contractionary<\/td><td>Left Shift<\/td><td>Rises<\/td><td>Falls<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-faqs\"><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1782890894822\"><strong class=\"schema-faq-question\">1. What are the main theories of interest covered in JAIIB IE &amp; IFS?<\/strong> <p class=\"schema-faq-answer\">The syllabus covers the Classical Theory, Keynes&#8217; Liquidity Preference Theory, and the Hicks-Hansen IS-LM Model.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1782890895574\"><strong class=\"schema-faq-question\">2. What does the Classical Theory of Interest explain?<\/strong> <p class=\"schema-faq-answer\">It explains that the rate of interest is determined by the equilibrium between savings and investment.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1782890896399\"><strong class=\"schema-faq-question\">3. What is Keynes&#8217; Liquidity Preference Theory?<\/strong> <p class=\"schema-faq-answer\">It states that the rate of interest is determined by the demand for money and the supply of money.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1782890897001\"><strong class=\"schema-faq-question\">4. What is the IS-LM Model?<\/strong> <p class=\"schema-faq-answer\">The IS-LM Model combines real and monetary factors to explain the equilibrium interest rate and income level.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1782890897485\"><strong class=\"schema-faq-question\">5. Which theory considers interest as a monetary phenomenon?<\/strong> <p class=\"schema-faq-answer\">Keynes&#8217; Liquidity Preference Theory considers interest to be a monetary phenomenon.<\/p> <\/div> <\/div>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n<ul class=\"wp-block-latest-posts__list is-grid columns-3 wp-block-latest-posts\"><li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-theories-of-interest\/\">Attempt JAIIB IE &amp; IFS Theories of Interest Quiz &amp; Download PDF<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-money-supply-and-inflation\/\">Attempt JAIIB IE &amp; IFS Money Supply and Inflation Quiz, &amp; Download PDF<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-supply-and-demand\/\">Attempt JAIIB IE &amp; IFS Supply and Demand Quiz, &amp; Download PDF<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-preparation-strategy-for-non-commerce-students\/\">JAIIB Preparation Strategy for Non-Commerce Students, Study Tips<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-sustainable\/\">Attempt JAIIB IE &amp; IFS Sustainable Development Goals Practice Quiz<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/www.oliveboard.in\/blog\/jaiib-ie-ifs-international-organization\/\">Attempt JAIIB IE &amp; IFS International Organizations Quiz, &amp; Download PDF<\/a><\/li>\n<\/ul>","protected":false},"excerpt":{"rendered":"<p>Preparing for the JAIIB IE &amp; IFS exam requires a strong understanding of economic concepts, and Theories of Interest is<\/p>\n","protected":false},"author":58,"featured_media":246619,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10353],"tags":[],"class_list":["post-246615","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-jaiib","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-50"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.6 (Yoast SEO v26.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Attempt JAIIB IE &amp; 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