Answer to Question #90425 in Macroeconomics for Jerome

Question

What were the Keynesian's attack on the quantity theory of money

Answer 1

Keyns formulated an alternative theory of reward and money.

Based on studies of economic crises that periodically shake the world economy over the past 50 years, J. M. Keynes came to the conclusion that in new conditions the market mechanism of social reproduction is not capable of its own, in principle, self-regulation ensures sufficient market equilibrium and uniform economic development. This is due to the objective need to supplement this mechanism of state regulation of the economy. J.M. Keynes finally rejected the postulates of the classical theory that "money does not matter" in the reproduction process, that this is only a minor technical tool, and proved the opposite: money is essential and plays an independent role in economic development. They actively influence the motives of behavior of economic entities, their economic decisions and therefore is a source of stimulation of entrepreneurial activity and the development of production. Thus, he rejected the “classical dichotomy”, which created a deep gap between the real economy and the monetary sphere. The main channel of communication between these areas of Keynes recognized the rate of interest, which is exposed to the forces of the money market (supply and demand for money) and at the same time itself affects the decisions about future investments.

Of these two Keynesian provisions followed the third - about the possibility of effective regulation of money and the conscious use of their state as an instrument of influence on the economy, on the current monetary policy in order to smooth out fluctuations in the economic cycle and the impact on economic development in general.