Page 123 - DECO402_Macro Economics

Macroeconomic Theory

Notes (iii) If I > S (whenever economy is at the condition of full employment) then the market rate of
interest is less than natural level. Their reasons are the increment in the fulfillment of currency
and increment the demands of bonds. The price increase to increasing the demands of bonds
and the market rate of interest is decrease.
(iv) If I < S (economy is not the condition of full employment)
(v) if the quantity of currency is less and the rate of intrest is increase, then I will be less and it
will be less more than S (I < S). In that condition, the demand decreased of inputs, its mean
the production cost is decrease. Finally the price level will be decrease.

Self Assessment

Multiple choice Questions:
3. Keynes’ is present the relation in currency and price—
(a) A principle (b) Rule
(c) Laws (d) None of these.
4. The change in the quantity of currency effect the …………………….and ratio on price
level.
(a) indirect (b) direct
(c) economic (d) none of these.
5. It can not be more employment on get the condition of full employment-
(a) Increment (b) Less
(c) Similarity (d) Non-similarity
6. The increment in cost means the ……………… in price-level.
(a) increment (b) decrement
(c) similarity (d) non-similarity

13.2 Superiority of Keynesian Approach
Keynesian Currency Principle is better than Currency Magnitude Principle, as it is clear from following
reasons:
1. Integration of Monetary Theory with the Theory of Value: One quality of Keynesian
principle is that this principle has tried to integrate Currency principle or Principles of
Normal Price-level and Value principle or Relative Price principle. According to Currency
Magnitude Principle, normal price-level and different goods and services are determined
from different ways. The cause of change in normal price-level is the change in the quantity
of currency. So it is called as Currency principle. On it’s opposite side, the cause of change
in relative prices is the change in supply and demand of commodities, so it is called as
Value principle. Don Patinkin has named this difference of Currency principle as Classical
Dichotomy. According to Keynes, This dichotomy is unreal. The main cause of change in
normal price-level and relative prices are the change in cost of production. The relative
prices are determined by the flexibility of supply and demand and cost of production. These
financial elements also determine Normal price-level. So Price Theory and Currency Theory
are affected by same causes.
2. More Realistic Theory: The Currency magnitude principle is valid only in full employment
condition only. But the full employment condition is a rare condition. Under employment

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