Page 119 - DECO402_Macro Economics

Macroeconomic Theory Ashwani Panesar, Lovely Professional University

Notes Unit-13: Keynesian Approach

Contents
Objectives
Introduction
13.1 Keynesian Theory Related with Money and Prices
13.2 Superiority of Keynesian Approach
13.3 Summary
13.4 Keywords
13.5 Review Questions
13.6 Further Readings

Objectives
After studying this unit, students will be able to:
y Know the Keynesian principle related to price and currency.
y Know the power of Keynesian approach.

Introduction

According to Keynes there is an indirect effect on price level to the change in quantity of currency. The
fulfillment of currency is only effect the rate of interest and cost of production to the level of price. To
understand the idea of Keynes’ related to the currency and prices note the following observations.

13.1 Keynesian Theory Related with Money and Prices

Keynes’ presented a principle related to price and currency in his famous book “A Treatise on Money”
and “The General Theory of Employment, Interest, and Money”. In this, an effort has been made to establish
the relation between money and price by bringing changes in the cost of production. According to
the Quantity Theory of Money, there is a direct and proportional relationship between the change in
quantity of money and price-level. However, according to Keynes, the change in quantity on money
indirectly affects the price-level. The fulfillment of currency is only effect the rate of interest and cost
of production to the level of price. To understand the idea of Keynes related to the currency and prices
note the following observations.

Self Assessment

Fill in the blanks:
1. According to Keynes’ there is a …………………….effect on price level to the change in
quantity of currency.
2. The change in the quantity of currency is effect the rate of………………………

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