According to Keynesian Economists money has an other role
to play which is as a store of value. They said that due to this role of money a link is established between present and future. And because
of this role money can influence the economic activity, level of income and
employment. Quite against classical neutrality of money, Keynes thinks that
money can alter the level of income and employment of an economy.
economists had integrated both the real and monetary sectors of the economy. But
Keynes clearly bifurcated the monetary and real sectors of the economy. They
that in monetary sector rate of interest is determined by demand for money and
supply of money. However, They stressed upon demand for money while the demand for
money rises for two motives:
(i) Transactive demand for money and (ii)
demand for money.
The transaction demand for money depends upon income levels of
the people. While speculative demand for money depends upon rate of interest.
The speculative demand for money is concerned with money as a store of value.
Thus according to Keynes money is not just demanded for transaction purposes but
it is also demanded to take advantage by the liquidity of money. In addition to
monetary sector, Keynes also presented their views regarding real sector. They
that equilibrium level of national income is determined where aggregate demand
is equal to aggregate supply.
They said that it is not necessary that equilibrium
level of national income will be determined at the level of full employment. Rather
equilibrium level of national income may be at full employment, may be at below full
employment and may be at above full employment.
The below full employment
represents deflation while above full employment represents inflation. Both
inflation and unemployment are undesirable. Therefore to remove them state will
have to interfere with fiscal and monetary policies. All this means that
according to Keynes money can be used to change the level of income and
employment. In this respect, he establishes a relationship between real and
monetary sectors of the economy. As if supply of money is increased the rate of
interest will decrease. Hence investment .national income and employment will be
boosted up removing unemployment. Moreover, through fiscal action by printing
new notes or borrowing from banks govt. can initiate public works program. They
will also have the effect of removing the unemployment. All this shows that in
Keynes economics money can influence the level of employment.