Page 120 - DECO402_Macro Economics

Unit-13: Keynesian Approach

According to the Keynes the quantity of currency is effect the price level in following way- Notes
1. The change in the quantity of currency is firstly affected the rate of interest. When the quantity
of currency is increase then the rate of interest is decrease, that there is no change in liquidity
preference for speculated objective. This system is continue like that-
The reason of increment in the supply of money-
y Being the increment in remain cash of people.
y Being the increment in the demand of bonds.
y Being the increment in the price of bonds.
y Decrease the rate of interest.

Notes There is an apposite relation in the rate of interest and the price of bonds. The
increment in the price of bonds is the decrements in the rate of interest in a simple
means and also apposite it.

2. The decrement in the rate of interest encourages the investment, with the condition that the
capital limit production MEC remains constant.
3. Increment in investment (I) increases the production, income and employment by
multiplication process. It is because that the sources are not fully used.
4. As production, income and employment(Y,O,N) increase, the demand of sources of
production increases. However, before the condition of full employment, because of being
their supply fully flexible, by the increment in production consequently there is no increment
in prices.
5. Once to get the condition of full employment cannot increase the more employment. So the
price is increase because of the increment in demand of inputs of production.
6. When the price of inputs is increase then the cost of production is also increase.
7. Produce things and the price of services is increase because of increment in the cost of
production.
In this flow chart shows the relation of price and currency.
Increment in the fulfillment of currency  increment in the cash fund of people  increment in the
demand of bonds  Increment of bonds price  decrease in rate of interest  increase in investment 
increase of demand of inward  increase of price of inward (if Instrument is in the state of employment
then)  increase in cost of production  increase in cost of products and services.

Notes When the condition is get of unemployment in a economy, then production and
employment is increase because of the increment in the quantity of currency.

The summary of price and currency related to Keynesian’ principle is like that- when the condition
of unemployment is found in an economy, then production and employment is increase because of

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