Traditional and Modern View! Keynesian theory was mainly concerned with cyclical unemployment which arose in industrialised capitalist countries especially in times of depression. During the period of Greet Depressionthe developed capitalist countries faced a drastic fall in GNP resulting in severe unemployment. Keynes explained that it was fall in aggregate effective demand for goods and services that was responsible for depression and huge unemployment that arose during the period of depression.
Classical and Keynesian Views on Money Article shared by: In this article we will discuss about the classical and Keynesian views on money.
The Classical View on Money: In the classical system, money is neutral in its effects on the economy. It plays no role in the determination of employment, income and output. Rather, they are determined by labour, capital stock, state of technology, availability of natural resources, saving habits of the people, and so on.
In the classical system, the main function of money is to act as a medium of exchange. It is to determine the general level of prices at which goods and services will be exchanged.
The quantity theory of money states that the price level is a function of the supply of money. The equation tells that the total money supply, MV, equals the total value of output, PT, in the economy. Assuming V and T to be constant, a change in M causes a proportionate change in P.
Thus money is neutral. The notion of neutrality of money in the classical system is explained in terms of Fig. The initial equilibrium is disturbed when the quantity of money is increased from M0 to M1. This raises commodity prices in proportion to the rise in M, since real output O is fixed.
In other words, the rise in the price level is exactly proportional to the rise in the quantity of money, i.
This increases the demand for labour by more than the supply of labour which is shown by the distance sd in Panel B. Thus the result of an increase in money is to raise money wages and prices in equal proportion, leaving output, employment and the real wage rate unaffected.
It is in this sense that money is a veil or neutral in the classical system. The Keynesian theory assigns a key role to money.
It contends that a change in the money supply can permanently change such real variables as the interest rate, the levels of employment, output and income.
Keynes believed in the existence of unemployment equilibrium in the economy.My book, The Economics of Illusion, published in , was essentially a critique of the late Lord Keynes's General Theory of Employment, Interest and Money.
My conclusion was, briefly, that what is new in Keynes's work is not good, and what is good is not new. In The General Theory, Keynes advances what has been described as a neomercantilist case about the importance of a nationally organized marketplace.
In fact, Keynesian theory assumes not just a marketplace but an economic community.
Keynesian analysis was abandoned in the turbulent s that signaled the end of rapid economic growth. Macroeconomics reconstituted itself as the study of economic growth.
Building on pioneering work by Frank Ramsey and Robert Solow, macroeconomics became the study of long-run economic growth.
Introduction to Keynes’s General Theory: Keynes’s General Theory of Employment, Interest and Money () is surely the most influential book of recent times. Secondly, it turned out that, contrary to what Keynes had said in “The General Theory,” monetary policy mattered a lot.
“In , money had no important role,” Samuelson recalled. In his theory of demand for money Fisher and other classical economists laid stress on the medium of exchange function of money, that is, money as a means of buying goods and services.
All transactions involving purchase of goods, services, raw materials, assets require payment of money as value of the transaction made.