By: Vikram.G.BFaculty, P.G. Dept. Of Commerce Vivekananda Degree College
Keynes attack against the classical quantity theorists for keeping separate monetary theory and value theory. Keynes reformulated quantity theory of money which brought about transition from a monetary theory of prices to a monetary theory of output. Acc. to Keynes the effect of a change in the quantity of money on prices is indirect and non-proportional. cont…..
All factors of production are in completely elastic supply as long as there is any redundancy. All redundant factors are standardized, completely divisible and exchangeable. There are invariable returns to scale so that prices do not hike or drop as productivity hikes. Effectual demand and volume of money vary in the same ration so long as there are any redundant resources.
Based on the assumptions, Keynesian chain of origination admits variations in the volume of money and in prices in an indirect one through the rate of interest. So when the volume of money is hiked its first impact is on the rate of interest which tends to drop. Given the marginal competence of capital, a drop in the rate of interest will enhance the amount of investment. The enhanced investment will hike effective demand through the multiplier effect thereby hiking earnings, productivity and employment. As the supply curve of aspects of production is completely elastic is a circumstance of redundancy, remuneration and non-remuneration aspects are accessible at invariable rate of wage.
There being invariable returns to scale, prices do not hike with enhance in productivity as long as there is any redundancy. Under the stipulation, productivity and employment will increase in the same ration as effectual demand and the effectual demand will hike in the same ration as the quantity of money. Therefore, as long as there is redundancy, productivity will vary in the same ration as the volume of money and there will be no variation in prices and when there is full employment prices will vary in the same ration as the volume of money. Thus, the reformulated amount thesis of money stresses the point that with hike in the volume of money, prices rise only when the level of full employment is reached and not before this.
Diagram (1) represents that as the volume Diagram (2) represents the correlationof money enhances from O to M, the level amidst volume of money and prices. Asof productivity also hikes along the OT long as there is redundancy, prices remainportion of the OTC curve. Since the invariable whatever enhance in the amountvolume of money reaches OM level, full of money. Prices start rising only after theemployment productivity OQF is being full employment level is accomplished. Inproduced. But after point T the the diagram, the price level OP staysproductivity curve becomes vertical for invariable at the OM volume of moneythe reason that any further enhance in the corresponding to the full employment levelvolume of money cannot raise of productivity OQF. But enhance in theproductivity beyond the full employment volume of money above OM raises prices inlevel OQF. the same ration as the volume of money. This is represented by the RC portion of the price curve PRC.
Direct relation. Stable demand for money. Nature of money. Effect of money.