The Keynesian Analysis Of The Demand For
Money Essay, Research Paper
General Theory? claimed money stock merely of import to the
extent that it influenced the i. rate, which led to reverberations ( excite
inv. & A ; ingestion ) . ? Keynesians
( non K himself ) ? note: pointed to a point where addition in MS would hold no
consequence on i. rate & A ; hence no consequence on econ in toto. Keynesian Motivations for Money Holding: Motivation for keeping money/cash balances
divided in 3 constituent parts: I. ) Transactions. ii. ) Precautionary. ? both income
det. three. ) Speculative? one rate det. ?
Motivation: given institutionalised
clip slowdowns between reception of factor incomes & A ; outgo spendings,
a certain sum of money required for normal daily minutess, and existent
value of this minutess demand will be closely related to existent income
of economy. ? The premise: existent volume
of minutess closely related to existent income of economy. ? 2.
Motive: Cash balances held in
instance of unanticipated spendings, basically of a dealing nature ( e.g. unanticipated
medical measure ) . ? Though vary between
indivs, sensible to anticipate that in the sum, related to existent income
& A ; in nominal footings to monetary value level. ? Together? signifier L1. 3.
Demand: ( or Asset Demand )
? for bad fiscal minutess. ?
( To simplify analysis, Keynes assumed being of merely 2 fiscal
assets? hard currency & A ; consols: involvement bearing, non-redeemable bonds ) . Keynes
argued opposite relationship between bond monetary values and involvement rates. ? V. simplified e.g. : say a bond issued for
$ 100 paying an one-year voucher of $ 5. ? The
effectual rate of involvement consequently 5 % . ?
If market rate were subsequently to lift to 10 % , holder of this bond would be
able to obtain merely $ 50 when sold? since $ 50 is all that? s needed to give an
involvement income of $ 5. ? Equally, had I.
rate fallen to 2.5 % , bond? s market value would come close $ 200. ? & # 8211 ;
Indivs will each hold their ain outlooks of a normal
rate of i. rate with which they will anticipate the market rate finally to
coincide. & # 8211 ;
At a high i. rate, indivs will anticipate i. rates to fall and
bond monetary values to rise. ? To profit from
the rise in bond monetary values indiv.s will utilize their bad balances to purchase
bonds. ? Therefore, when i. rates are high,
bad balances are low. & # 8211 ;
At low i. rates, indivs will anticipate i. rates to lift and bond
monetary values to fall. ? To avoid the
losingss associated with a autumn in bond monetary values, indivs will sell their bonds and
add to their bad hard currency balances. ?
Therefore, when i. rates are low, bad balances will be high. ? & # 8211 ;
Ultimately, i. rate reached where no one thinks it can travel
higher? cosmopolitan outlooks of a autumn ( indicate A in Fig 1b ) ? idle spec hard currency
balances zero, as everyone will seek to travel into bonds? in outlook of doing a capital addition. & # 8211 ;
Ultimately, minimum i. rate such that univ. outlook of a
hereafter rise? here no call for bonds with demand for idle balances infinite up
to number wealth. ? ( liquidness trap )
& # 8211 ;
Inverse relationship between rate of involvement and the
bad demand for money. ( a ) L1 = Transactions & A ; Precautionary MD? ( B ) Speculative MD? ? ? ? ? ? ? ( degree Celsius ) Total MD ( Individual Speculative MD? remainders on
premise that indivs have a construct of normal involvement rate: if current
market i. rate & gt ; normal, outlook that i. rates will fall/bond Ps will
rise? so Wholly plus hard currency to purchase bonds? so spec hard currency demand zero. ? If converse, spec hard currency demand space: so
implies that indivs either keep hard currency or bonds but non both ) Money Market Equilibrium: & # 8211 ;
Keynesian theoretical account
implies MD increases as i. rates fall. ?
Besides implies that increased MS ( Fig 3 ) implies fall in i. rates, which
in bend stimulates inv & amp ; cons? N spendings, impact magnified by multiplier,
ensuing in enlargement of money Nat Inc. ?
Whether end product or P addition mostly dependent on unemployed
resources/extent of trim capacity. ? But
1 exclusion ( Liquidity trap ) : if i. rates so low that cosmopolitan belief
that they? ll rise. ? So no 1 willing to
purchase gov. bonds. ? If gov. enlarges MS ( =
Money Stock ) , would be no consequence on i. rates ( Fig 4 ) . ? Since money stock at any one clip must be
held by person, it would happen its manner into custodies of public. ? But no alteration in income degree, so no desire
to add to dealing balances. ? With no
desire to buy gov. bonds, merely added to speculative money retentions?
implies a minimal restraint on involvement rates. ? & # 8211 ;
Liquidity Trap? implies powerlessness of Monet pol at a point,
where increased Money SK accumulated in idle balances & # 8211 ;
So K? N Theory
suggests that impact of a MS addition will change? ( sometimes cut down i. rates, sometimes non ) , so, unlike trad
measure theory, can? t make 1 generalized statement about impact of MS
hike. ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? i. rates in conventional K? N theory. ? ? ? ? ? ? ? ? ? ? ? ? ? ? of an hypertrophied MS upon i. rate.