Answer to Question #64058 in Finance for Genie

Question

What conditions must be true for monetary policy to be effective according to Keynesian Theory?

Answer 1

According to Keynesian Theory monetary policy can produce real effects on output and employment only if some prices are rigid — if nominal wages (wages in dollars, not in real purchasing power), for example, do not adjust instantly. Otherwise, an injection of new money would change all prices by the same percentage. So, Keynesian models generally either assume or try to explain rigid prices or wages.