Title: MONEY, EMPLOYMENT, INFLATION, AND A MORE COMPLETE KEYNESIAN MODEL
Abstract: This chapter focuses on a Keynesian view that states that expansionary monetary policy would reduce the interest rate, thereby stimulating investment and leading to an increase in aggregate demand. A restrictive monetary policy would increase the interest rate, thereby discouraging investment and reducing aggregate demand. The interest rate is the mechanism that transmits monetary policy in the Keynesian model. The expansionary macro policy was a major factor contributing to the inflation. In the Keynesian model, monetary policy would be ineffective as a tool to stimulate demand if the economy were in the liquidity trap as evidenced by a horizontal demand for money schedule, if investment were insensitive to a decline in the interest rate as indicated by a vertical investment schedule, or if banks failed to extend loans, expanding the money supply, even though the monetary authorities created excess reserves. Keynesians believe that a market-directed capitalist economy is inherently unstable. However, proper monetary and fiscal policies can be used to keep the economy on a stable course. A planned budget deficit and monetary acceleration are appropriate during recession. A budget surplus and monetary deceleration can be used to restrain an inflationary boom. Keynesians reject the balanced-budget concept.
Publication Year: 1980
Publication Date: 1980-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
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