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<p>[QUOTE=&quot;V. Kurt Bellman, post: 2662036, member: 71723&quot;]Well we can immediately dismiss all of that garbage because Keynesianism isn&#039;t about the money supply or money aggregates at all. It&#039;s about incomes, not money.</p><p><br /></p><p>Quoted material below:</p><p><font size="4"><b><b>Superiority of the Keynesian Theory over the Traditional Quantity Theory of Money:</b></b></font></p><p>The Keynesian theory of money and prices is superior to the traditional quantity theory of money for the following reasons.</p><p><br /></p><p>Keynes’s reformulated quantity theory of money is superior to the traditional approach in that he discards the old view that the relationship between the quantity of money and prices is direct and proportional. Instead, he establishes an indirect and non-proportional relationship between quantity of money and prices.</p><p><br /></p><p>In establishing such a relationship, Keynes brought about a transition from a pure monetary theory of prices to a monetary theory of output and employment. In so doing, he integrates monetary theory with value theory. He integrates monetary theory with value theory and also with the theory of output and employment through the rate of interest.</p><p><br /></p><p>In fact, the integration between monetary theory and value theory is done through the theory of output in which the rate of interest plays the crucial role. When the quantity of money increases the rate of interest falls which increases the volume of investment and aggregate demand thereby raising output and employment. In this way, monetary theory is integrated with the theory of output and employment.</p><p><br /></p><p>As output and employment increase they further raise the demand for factors of production. Consequently, certain bottlenecks appear which raise the marginal cost including money wage rates. Thus prices start rising.</p><p>Monetary theory is integrated with value theory in this way. The Keynesian theory is, therefore, superior to the traditional quantity theory of money because it does not keep the real and monetary sectors of the economy into two separate compartments with ‘no doors or windows between the theory of value and the theory of money and prices.’</p><p><br /></p><p>Again, the traditional quantity theory is based on the unrealistic assumption of full employment of resources. Under this assumption, a given increase in the quantity of money always leads to a proportionate increase in the price level. Keynes, on the other hand, believes that full employment is an exception.</p><p><br /></p><p>Therefore, so long as there is unemployment, output and employment will change in the same proportion as the quantity of money, but there will be no change in prices; and when there is full employment, prices will change in the same proportion as the quantity of money. Thus the Keynesian analysis is superior to the traditional analysis because it studies the relationship between the quantity of money and prices both under unemployment and full employment situations.</p><p><br /></p><p>Further, the Keynesian theory is superior to the traditional quantity theory of money in that it emphases important policy implications. The traditional theory believes that every increase in the quantity of money leads to inflation.</p><p><br /></p><p>Keynes, on the other hand, establishes that so long as there is unemployment, the rise in prices is gradual and there is no danger of inflation. It is only when the economy reaches the level of full employment that the rise in prices is inflationary with every increase in the quantity of money. Thus “this approach has the virtue of emphasizing that the objectives of full employment and price stability may be inherently irreconcilable.”[/QUOTE]</p><p><br /></p>

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