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Dominance Of The Keynesian Theory Over The Traditional Quantity Theory Of Money

 Dominance of the Keynesian Theory over the Traditional Quantity Theory of Money

    The Keynesian thesis of money and prices is better-quality to the traditional volume thesis of money for the following grounds.

    Keynes’ reformulated volume thesis of money is considered to be better to the traditional approach, in that he cast-offs the previous outlook that the association amidst volume of money and prices is straight and comparative. In its place he institutes an oblique and non-comparative association amidst volume of money and prices.

    In instituting such association, Keynes brought about a transition from a pure monetary thesis of prices to a monetary thesis of productivity and employment. As doing so, he incorporates monetary thesis with value thesis, with the thesis of productivity and employment through the rate of interest.

    Actually, the incorporation amidst monetary thesis and value thesis is performed through the thesis of productivity in which the rate of interest performs the decisive function.

    The Keynesian thesis is thus, superior to the traditional volume thesis of money for the reason that it does not keep the real and monetary segments to the fiscal system into two diverse cubicles with “no doors or windows amidst the thesis of value and the thesis of money and prices.”

    Yet again the traditional volume thesis depends on the non-factual hypothesis of full employment of resources. Under this hypothesis a given augment in the volume of money always tends to a rational augment in the price level. Keynes on the other hand, assumes that full employment is an exemption.

    Hence, as long as there is redundancy, productivity and employment will vary in the same ration as the volume of money, however there will be no variation in prices. When there is full employment, prices will vary in the same ration as the volume of money.

    Thus the Keynesian scrutiny is supreme to the traditional examination for the reason that it examines the association amidst volume of money and prices both under redundancy and full employment stipulations.

    Also, the Keynesian thesis is supreme to the traditional volume thesis of money in that it highlights vital strategy insinuations. The traditional thesis assumes that every augment in the volume of money tends to inflation. Keynes on the other hand, institutes, that so long as there in redundancy, the rise in prices is gradual and there is no danger of inflation.

    It is only when the fiscal system reaches the level of full employment that the rise on prices is inflationary with every hike in the volume of money. thus “this approach has the virtue of highlighting that the objectives of full employment and price stability may be intrinsically incompatible.”

Criticisms of Keynes Thesis of Money and Prices

Keynes views on money and prices have been criticised by the monetarists on the following causes:

  1. Direct Association
  1. Stable Demand for Money
  1. Nature of Money and
  1. Effect of Money
  1. Direct Association

    Keynes misguidedly took prices as unchangeable and that the effect of money materializes in his scrutiny in terms of quantity of goods exchanged somewhat than their average prices.

    That is why Keynes adopted an indirect mechanism through bond prices, interest rates and investment of the effects of fiscal variations on monetary performance. But the actual effects of monetary variations are direct some what than meandering.

  1. Stable Demand for Money

    Keynes believed that monetary variations are largely absorbed by variations in the demand for money. but Friedman has depicted on the basis of his pragmatic examines that the demand for money is hugely invariable.

  1. Nature of Money

    Keynes was unsuccessful in understanding the true nature of money. He assumed that money could be exchanged for bonds only. Actually, money can be exchanged for many diverse kinds of like wealth like bonds, physical assets, securities human wealth etc.

  1. Effect of Money

    Because Keynes wrote for a depression period, this led him to conclude that money had little effect on earnings. According to Friedman, it was the retrenchment of money that impetuous the depression.

    It was thus, incorrect on the part of Keynes to argue that money had little effect on earnings. money does affect national earnings.

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