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Keynesian Outlook

 Keynesian Outlook
  1. In the Keynesian analysis fiscal policy plays a critical role in affecting fiscal activity.
  1. It competes that a variation in the supply of money can permanently vary such variables as the rate of interest the total demand and the level of employment, productivity and earnings.
  1. Keynes assumed in the subsistence of redundancy symmetry.
  1. This entails that an enhancement in money supply can fetch about permanent enhancement in the level of productivity.
  1. The final prejudice of money supply on the price level is based on its influence on total demand and the elasticity of the supply of total productivity.
  1. In a stipulation of redundancy Keynes advocated inexpensive fiscal strategy.
  1. When the supply of money is enhanced its primary outcome is on the interest rate which is likely to drop.
  1. Provided the marginal efficiency of capital a drop in the interest rate will enhance investment.
  1. The enhanced investment will raise effectual demand through the multiplier effect thus enhancing earnings, productivity and employment.
  1. Under the situations productivity and employment will enhance in the equal ratio as the supply of money and so in effectual demand will enhance in the same ratio as the supply of money.
  1. But once full employment is reached productivity stops to respond all to variations in the supply of money and so in effectual demand.
  1. An enhancement in the supply of money beyond the level of full employment would raise the price level in the classical fashion.
  1. If whichever the demand and supply of money varies the symmetry interest rate would vary.
  1. The supply of money is ascertained by the authority which is normally fixed in the short run.
  1. In other terminology, the supply of money curve is perfectly inelastic.
  1. The money demand is the desire to hold cash for transactions, precautionary and speculative purpose.
  1. Money held for transactions and precautionary purposes is based on the level of earnings.
  1. The speculative demand for money demand is based on the interest rate or bond prices.
  1. It is in fact, expectations about variations in bond prices or in the market rate of interest that ascertain the speculative demand for money.
  1. Keynes regarded only two types of assets in his analysis, money and bonds.
  1. Money does not capitulate anything explicitly and bonds pay as explicit interest rate.
  1. Thus people wish to posses bonds somewhat than liquid money for the reason that interest is paid to bond holders.
  1. Keynes held that the demand for money is a declining function of the interest rate.
  1. The higher the rate of interest the lower the demand for money and alternatively.
  1. This pessimistic association among the demand for money and the interest rate provides a connection between variations in the supply of money and the level of fiscal performance.
  1. Keynes himself proceeded to question the effectiveness of his fiscal policy under definite situations.
  1. He argued that at a very low rate of interest, the money demand curve becomes absolutely flat.
  1. This implies that additional enhancement in the money supply by the fiscal authority cannot decrease the interest rate.
  1. This entails that there will be no outcome on investment, earnings and fiscal strategy does not overpower fiscal performance.
  1. Provided an interest inelastic investment function fiscal policy manoeuvred under definite restrictions.
  1. Thus, he has written “if we are tempted to assert that money is the drink which kindles the system of performance, we should remind ourselves that there might be quite a few steps among the cup and the lip.”
  1. The efficiency of fiscal policy is based on the following:

    1. If the enhancement in the supply of money decreases the interest rate provided the demand for money does not become infinite and

    2. The decline in the interest rate enhances investment demand provided it is elastic to the interest rate.

  2. These restrictions become more solemn during recession and therefore fiscal policy becomes unproductive.
  1. That’s the reason Keynes preferred investment on public projects during recession.
  1. Thus he has written “I am not rather disbelieving of the success of a simply fiscal policy directed towards influencing the interest rate.
  1. Actually, he advocated supplementing fiscal policy with monetary policy during recession.
  1. Recent researches have depicted that Keynes was distorted by his adopters in characterising that he was not a votary of fiscal strategy.

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