We can say either that the demand for money has increased or that the velocity of circulation, the rate of spending, has diminished, and vice versa. It has been observed that at low rates of interest, people prefer to hoard their money rather than use it to buy securities and vice versa. 1. Keynes argued in his theory, that when interest is at a lower rate, people will be encouraged to increase money … Thus, in Keynes’ view, the demand for money is a function of both income and interest rate, though in the classical theory, it was a function of income alone. PKE rejects the methodological individualism that underlies much of mainstream economics. Nevertheless, the trend of a community’s aggregate demand for money, under the transactions motive, depicts a high degree of correlation of proportionality to the size of money of national income. 11 3. 3. Keynes’s theory of money reveals how the problem of involuntary unemployment is inextricably bound up in the liquidity preferences by wealth-holders. Discover how the debate in macroeconomics between Keynesian economics and monetarist economics, the control of money vs government spending, always comes down to proving which theory is better. Keynesian economics focuses on using active government policy to manage aggregate demand in order to address or prevent economic recessions. There are three motives on the part of the people to hold cash: (a) Transaction demand for money, (b) Precautionary demand for money, and (c) Speculative demand for money. Keynesian economics generally holds that spending pushes the growth or shrinking of the economy, while monetarist thinkers say the amount of money in circulation is of greatest importance. Both theories pay significant attention to money supply and demand for money as essential factors that influence the rate of interest within the economy. The purpose of holding money under the speculative motive is to use it for speculation for earning income. The purpose is speculation. Enter your email address below and we will send you your username, If the address matches an existing account you will receive an email with instructions to retrieve your username. The Demand for Money: The Classical and the Keynesian Approach Towards Money Article shared by Read this article to learn about the demand for money: the classical and the Keynesian approach towards money: The demand for money arises from two important functions of money. This paper centers on Keynes' theory of money and his attack on the classical model. Keynesians believe consumer demand is the primary driving force in an economy. Demand for Money: The Keynesian Approach. 0 0 upvotes, Mark this document as useful 0 0 downvotes, Mark this document as not useful Embed. give the pleasure of snob appeal. However, future uncertainty is an important factor determining the precautionary demand for money. Keynesian and monetarist theories are two economic theories offering different opinions on what drives the economy and how the government should fight recessions. To Keynes, demand for money does not mean the actual money balances held by the people, but what amount of money balances they want to hold. 2. LIQUIDITY PREFERENCE THEORY The cash money is called liquidity and the liking of the people for cash money is called liquidity preference. Consideration of the post-General Theory literature reveals that a key aspect of that link concerns the velocity of circulation of money. Second: Keynes’s Theory of Money: Liquidity Preference Theory • In 1936, economist John M. Keynes wrote his influential book, The General Theory of Employment, Interest Rates, and Money. According to Keynes people demand liquidity or prefer liquidity because they have three different motives for holding cash rather than bonds etc. Its main tools are government spending on infrastructure, unemployment benefits, and education. Thus, the precautionary demand will be relatively stable. Therefore, any individual who expects the rate of interest to rise in the near future will not invest his money in bonds, etc. According to Keynes, theories of interest have little meaning if speculative demand for money is overlooked. E.Z. Essentially, Keynes’ theory of demand for money is an extension of the Cambridge cash-balances approach and stresses the asset role (i.e., the store of value function) of money. demand for money holdings through the portfolio motive. Now, viewing the demand for money in its modern terminology, the question may be asked: Why should there be demand for money to hold, or why do people prefer to keep idle cash balances? In short, the Keynesian approach to the demand for money stresses the public’s need for cash or money balances as a store of value at a particular point of time. The reason for this inverse relationship lies in the fact that securities prices (and also of all capital values) actually are the present (capitalised) value of the future flow of income, discounted at the market rate of interest for the type of investment involved. According to Keynes investment decisions are taken by comparing the marginal efficiency of capital (MEC) or the yield with the real rate […] Content Guidelines The time gap involved between the receipts of successive income flows and the corresponding expenditure is very important in determining an individual’s transactions demand for money. Instead, PKE argues that fundamental uncertainty and social conflict require an analysis of … Keynesian Theory of Demand for Money (HINDI) - Duration: 18:50. –In other words, his/her optimum portfolio of assets should … Medium of exchange 2. Therefore, the amount of money held under the speculative motive, as Hicks puts it, or rather, for a liquidity reserve purpose will be a matter of the relative advantage, at the margin, of holding money as against the holding of an interest yielding asset (near-money asset). Keynesian and monetarist theories offer different thoughts on what drives economic growth and how to fight recessions. Graphical illustration of the Keynesian theory. Indeed, it seems likely that wealth would also roughly double in nominal terms over a decade in which nominal income had doubled. By keeping cash-balances they tend to bridge the gap of time interval between receipt of incomes and its disbursement.
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