Page 60 - DECO402_Macro Economics

Unit-5: Classical Theory of Employment

on that things that investment demand increased to remove the unemployment. But by this Notes
the balance level get, it is the short duration employment level not full employment level.
8. Importance of Speculative Demand: Classic economist believed that currency is demand
for the objective and transaction. They did not consider the speculative demand because for
the speculative objective currency is related to remains. But Keynes is not satisfying by this
opinion. He force on the importance of speculative demand. He tells that earned interest by
property to keep the transaction objective can less on low interest rate. But on low interest
rate the speculative demand will more. So the rate of interest will not fall by a special lowest
level and the speculative demand of interest will fully flexible. It is the liquidity trap of
Keynes, classical economist were failed to analyze it.
Keynes cleared in this reference that being on positive interest rate possibly to more from the
investment of savings. Liquidity trap is stopped to fall down from a certain lowest rate of
interest rate. It is show in figure 5.6. where SS is a saving curve and II is investment curve. If
liquidity traps on Or i.s. interest rate then it stops to fall on Or of interest rate. In the situation
1
of liquidity trap of Or interest rate is more than of saving to investment. So economy will
1
not establish on the full employment level E where
savings and investment is equal but short employment
level where more saving possible.
Keynes told above that interest rate is giving on zero
then saving will more by investment. It shows in
figure 5.6 where II curve is shifted and become I I
1 1
and show decrement in investment. Such situation is
found. Zero on the zero interest rate saving is i s more
o o
from investment. In that situation, classical saving and
investment curve is intersect on E point when Or’ is
1
negative on interest. It is the inconsistent situation.
9. Money not Neutral: Classical economist believed Figure 5.6
that currency was not effective. So he did not involve
the production, employment and interest rate in currency principle. According to him, the
level of production and employment level and balance rate of interest are decided by actual
powers. Keynes criticizes the classical opinion that currency principle is different from value
principle. He joints the value principle and currency principle and interest principle took
on the currency principle. He joined the production principle and currency principle with
value principle. So by this he show established relation among the quantity of currency and
price level. Example, when the quantity of currency increased then interest rate decreased,
investment increased income and production increased, demand increased, sources cost and
wage increased, related prices increased and normal price level increased. So by this Keynes
joined the currency and actual field of economics.
So the classical principle employment is not able to solve the present economic problems
of capitalism world.

Self Assessment

State whether the following statements are True or False:
7. Hardness in the structure of wage and interference in the causation of market economic
come unemployment.
8. If the quantity of currency is doubled then price level will also double.

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