The document summarizes Keynes' reformulation of the quantity theory of money, which brought about a transition from a monetary theory of prices to a monetary theory of output. According to Keynes, an increase in the money supply indirectly affects prices through its impact on interest rates, investment, effective demand, employment and output. As long as there is slack resources (redundancy), prices remain stable despite increases in output and money supply, as productivity and effective demand rise proportionately. Only at full employment will further money supply increases directly lead to price increases in the same proportion. The document supports this with two diagrams.

1. By: Vikram.G.B
Faculty, P.G. Dept. Of Commerce
Vivekananda Degree College

2.  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…..

3.  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.

4.  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.

5.  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.

6. Diagram (1) represents that as the volume Diagram (2) represents the correlation
of money enhances from O to M, the level amidst volume of money and prices. As
of productivity also hikes along the OT long as there is redundancy, prices remain
portion of the OTC curve. Since the invariable whatever enhance in the amount
volume of money reaches OM level, full of money. Prices start rising only after the
employment productivity OQF is being full employment level is accomplished. In
produced. But after point T the the diagram, the price level OP stays
productivity curve becomes vertical for invariable at the OM volume of money
the reason that any further enhance in the corresponding to the full employment level
volume of money cannot raise of productivity OQF. But enhance in the
productivity beyond the full employment volume of money above OM raises prices in
level OQF. the same ration as the volume of money.
This is represented by the RC portion of the
price curve PRC.

7.  Direct relation.
 Stable demand for money.
 Nature of money.
 Effect of money.