MONEY, BANKING AND FINANCE

Money, Banking and Finance

Money, Banking and Finance

PART I

Here, we need a theory of loanable funds in the cursory look and how it relates to liquidity preference theory of contrast. In the liquidity preference theory of full employment and balanced market is in the interest rate for loanable funds market. Cairns Instead, explain why the market to solve the full employment (in line with empirical evidence), then the interest rate of progress another point of view.

Pointed out that the liquidity preference theory (see Note # 3), the economy is always at full employment level of output and the market for loanable funds into the market is always balance. Nominal wage and price flexibility to ensure that the real wage is this: it is the total output is always full employment level. In contrast Keynes is a special case of full employment; the system can solve the bellows of its full employment level of output. In fact, in his view, this may be more often the case.

He provided empirical evidence, undermining some of neoclassical theory is that (especially in the Great Depression), flexible wages and prices does not guarantee full employment. Indeed, despite the decline in real wages, this does not cause employers to employ excess labor supply. In fact, as Keynes pointed out, falling wages mean a drop in demand, decline in corporate earnings, so expected profits fall. Similarly, even low interest rates and falling, no new investment occurred (this is the same reason - profit forecasts are too low.) Recall that the liquidity preference theory of interest is a reward and consumption, which is the cost of borrowing parting. In the case of low interest rates, borrowing costs low, therefore, to encourage new investment theory. However, no new investment occurred. The economy contracted 25% of the population unemployed. So need a new theory to explain why full employment does not clear the market.

Keynes argued that thorny question is: What decisions at the macroeconomic level of income and employment levels? Why is below full employment level (silver) equilibrium level of income? For the same reason the employment of full employment (NF) level?

Obviously flexible wages, prices and interest rates did not provide an answer. In other words, balanced employment and income will have their full employment and income levels only under very special circumstances, ie, Ne = NF and leaves = silver is a special case!

In Keynes's approach in answering these questions is new, he is not focusing on price adjustment (wages, prices, interest rates), but adjustment in the number of (total income) and expectations of the future (the expected return on investment, also known as the marginal efficiency of capital .) Keynes also showed that (though always equal to the savings-investment), it was decided to total investment income, and then leaves the decision as a residual of consumption and savings. Keynes's paradox of thrift, so that attempts to increase savings, actually reduces the aggregate demand, thereby reducing revenue. More on this ...