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    Quantity Theory of Money, Maynard Keynes

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    Prince Alexis Garcia
    1) John Maynard Keynes disagreed with older quantity theories of money because they made unrealistic assumptions. 2) According to Keynes, an increase in the money supply initially increases aggregate demand, output, and employment, but not prices, as resources are still unemployed. However, as full employment is reached, any further increase in money supply will result in proportional price increases but no change in output. 3) Keynes' view was subject to criticism on grounds such as his treatment of prices as fixed, assumption of a stable demand for money, failure to understand money's true nature as exchangeable for many asset types, and conclusion that money had little effect on income during depressions.

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    Quantity Theory of Money, Maynard Keynes

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    Prince Alexis Garcia
    72 views2 pages
    1) John Maynard Keynes disagreed with older quantity theories of money because they made unrealistic assumptions. 2) According to Keynes, an increase in the money supply initially increases aggregate demand, output, and employment, but not prices, as resources are still unemployed. However, as full employment is reached, any further increase in money supply will result in proportional price increases but no change in output. 3) Keynes' view was subject to criticism on grounds such as his treatment of prices as fixed, assumption of a stable demand for money, failure to understand money's true nature as exchangeable for many asset types, and conclusion that money had little effect on income during depressions.

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    1) John Maynard Keynes disagreed with older quantity theories of money because they made unrealistic assumptions. 2) According to Keynes, an increase in the money supply initially increases aggregate demand, output, and employment, but not prices, as resources are still unemployed. However, as full employment is reached, any further increase in money supply will result in proportional price increases but no change in output. 3) Keynes' view was subject to criticism on grounds such as his treatment of prices as fixed, assumption of a stable demand for money, failure to understand money's true nature as exchangeable for many asset types, and conclusion that money had little effect on income during depressions.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    72 views2 pages

    Quantity Theory of Money, Maynard Keynes

    Uploaded by

    Prince Alexis Garcia
    1) John Maynard Keynes disagreed with older quantity theories of money because they made unrealistic assumptions. 2) According to Keynes, an increase in the money supply initially increases aggregate demand, output, and employment, but not prices, as resources are still unemployed. However, as full employment is reached, any further increase in money supply will result in proportional price increases but no change in output. 3) Keynes' view was subject to criticism on grounds such as his treatment of prices as fixed, assumption of a stable demand for money, failure to understand money's true nature as exchangeable for many asset types, and conclusion that money had little effect on income during depressions.

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    of 2

    Prince Alexis P.

    Garcia September 25, 2019


    Economic Development
    Quantity Theory of Money

    John Maynard Keynes’ disagreement with the older quantity, theories which are based
    on unrealistic assumption per se, had led him to reformulate the former’s assumption into
    his.
    1. Effective demand will not change in exact proportion to the quantity of money.
    It will partly spend itself in increasing output and partly in increasing the price level.
    2. Since resources are homogenous, there will be diminishing, and not constant
    returns as employment gradually increases. So long as there are unemployed
    resources, the general price level will not rise much as output increases. But a
    sudden large increase in aggregate demand will encounter bottlenecks when
    resources are still unemployed.
    3. Since resources are not interchangeable, some commodities will reach a
    condition of inelastic supply while there are still unemployed resources
    available for the production of other commodities. It may be that the supply of
    some factors becomes inelastic or others may be in short supply and are not
    interchangeable. This may lead to increase in marginal cost and price.
    4. The wage-unit will tend to rise, before full employment has been reached. Price
    would accordingly rise above average unit cost and profits would increase rapidly
    which, in turn, tend to raise money wages owing to trade union pressures.
    Diminishing returns may also set in. As full employment is reached, the elasticity of
    supply of output falls to zero and prices rise in proportion to the increase in the
    quantity of money.
    5. The remunerations of factors entering into marginal cost will not all change in
    the same proportion. According to Keynes, an increase in the quantity of money
    increases aggregate money demand on investment as a result of the fall in the rate
    of interest. This increases output and employment in the beginning but not the price
    level. But when the economy reaches the full employment level of output, any further
    increase in aggregate money demand brings about a proportionate increase in the
    price level but output remains unchanged at that level.

    John Maynard Keynes’ view on quantity of money, just like everybody, is technically,
    common for criticism.
    1. Direct Relation. Keynes mistakenly took prices as fixed so that the effect of money
    appears in his analysis in terms of quantity of goods traded rather than their average
    prices. That is why Keynes adopted an indirect mechanism through bond prices,
    interest rates and investment of the effects of monetary changes on economic
    activity. But the actual effects of monetary changes are direct rather than indirect.
    2. Stable Demand for Money. Keynes assumed that monetary changes were largely
    absorbed by changes in the demand for money. But Friedman has shown on the
    basis of his empirical studies that the demand for money is highly stable.
    3. Nature of Money. Keynes failed to understand the true nature of money. He
    believed that money could be exchanged for bonds only. In fact, money can be
    exchanged for many different types of assets like bonds, securities, physical assets,
    human wealth, etc.
    4. Effect of Money. Since Keynes wrote for a depression, this led him to conclude that
    money had little effect on income. According to Friedman, it was the contraction of
    money that precipitated the depression. It was, therefore, wrong on the part of
    Keynes to argue that money had little effect on income. Money does affect national
    income.
    Keynes theory on quantity of money is not perfect just like any economists who
    defined and made their own postulates about this matter. Each were criticized. I found
    Keynes’ quantity theory of money justifiable. Let me based my subscription to his
    assumptions. Lately, I’ve learned that as demand for money increases, quantity of money
    decreases leading an upward effect on interest rates, thus I believe that his first assumption
    is true, as long as supply and demand for money is concerned. Moving on, high interest
    rates will lead to a decrease in money supply, decrease in production output, thus non-
    utilizing resources. Which in return, increases demand. Prices of commodities will in no way
    increase suddenly just like in inflation wherein interests rates are at low and money supply is
    in an outflow and in vice versa in cases where interest is low. Economist termed it as
    Contractionary Monetary Policy and Expansionary Monetary Policy respectively.

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