Keynesian theory of money proposes that the relationship between the quantity of money and prices is indirect and non-proportional, unlike quantity theorists. Key provisions include that the economy is unstable and the state should use tools like monetary policy; a change in the money supply causes interest rate changes which lead to changes in investment demand and nominal GDP; and Keynes identified three macroeconomic policies - monetary, fiscal, and incomes policy - that affect GDP. Specifically, monetary policy aims to decrease interest rates to boost investment via money supply increases, while fiscal policy directly increases public investment when private investment is insufficient.

1. Keynesian theory of money
British economist John Maynard Keynes (1883-1946) proposed theory about
the nature of money and its impact on production in the late 1920s and early 1930s.
Keynes does not agree with the older quantity theorists that there is a direct
and proportional relationship between quantity of money and prices. According to
him, the effect of a change in the quantity of money on prices is indirect and nonproportional.
Key provisions in the theory of money, the following:
1. The market economy is an unstable system with many internal "vices or
defects" Therefore, the state should regularly use different tools of economic
regulation, including monetary.
2. The chain of causality in the money supply and nominal GNP is: change
the money supply is the cause of changes in the level of interest rates, which leads
to a change in investment demand and a change in nominal GNP.
3. Main theoretical equation, which is based on Keynesianism:
Y = C + G + I + NX,
where Y - nominal GNP, C - consumer spending, G - government spending
on goods and services, I - private plannedinvestments, NX - net exports.
According to Keynes, there are three different types of macroeconomic
policies that affect the change in GDP.
• Monetary policy. The goal of increasing the money supply is decrease the
rate of interest to increase the total investment and therefore national income.
• Fiscal policy. As a rule, the investments made by enterprises spontaneously
appear insufficient and monetary policy is not able to ensure their growth. In this
case, the investment will complement public investment for public funds to such a
volume that the cumulative investment reached a level consistent with full
employment.
• Incomes policy. Since the tendencyto consume decreases individuals
according to their income, the increase in the average propensity to make the
transfer from the necessary social categories with high incomes to those categories
whose incomes are low.
Thus, Keynesianism in the system of state regulation of the economy played
a leading role expansionary fiscal policy, and of secondary importance - monetary.
4. Keynesians say that the chain of causality between the money supply and
nominal GDP is large enough. Increasing the money supply at a constant demand
might lead the economy, among other things, the so-called "liquidity trap": the
interest rate may be reduced to a critical level. If this continues to increase the
money supply, the interest rate cannot react to it, because below a certain level, it
cannot fall. If the interest rate does not react to changes in the money supply, it
breaks the chain of causality between the growth of the quantity of money and
nominal GNP.
5. In connection with the foregoing, the Keynesians believe monetary policy
is not as effective means of stabilizing the economy, such as fiscal or budgetary
policy.