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Home History of Money Definition of Money According to Keynesian Economists


Definition of Money According to Keynesian Economists:


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.


Classical 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 said 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) Speculative 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 said 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.


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