Keynes Theory Of Demand Of Money Analysis
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A CRITQUE ON KEYNES’ THEORY OF DEMAND OF MONEY
To fully offer a criticism on Keynes theory on demand, there is need to fully explain Keynes’ theory on the demand for money.
It was propounded by the man John Maynard Keynes, a British economist in his book “The General Theory of unemployment, interest and money” which he wrote in the year 1936. To understand the theory, there are two interrelated questions which we need to divide and separate. One is money demanded and what are the determinants of the demand of money?
WHY IS MONEY DEMANDED?
One of the characteristics of money is that is the only generally acceptable means of exchange, it is perfect liquidity. This means that it gives its holder conveniences
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Money in itself doesn’t earn its holder interest income and its capital value is always fixed while bonds earn interest income to its holders. But then this income can be wiped out if prices of bonds fall in the nearest future, we also find out that bond prices are inversely related to interest …show more content…
This is a result which hasn’t been fully accepted, even by Keynes followers. It is seen to damage his own theory of interest rate determination but more so the quantity theory of money and effectiveness of monetary policy.
CRITICISMS OF KEYNES THEORY
It doesn’t explain the existence of different interest rates that prevail in the market simultaneously.
The Keynesian theory explains interest only in the short run. It doesn’t give clue to the interest rate in the long run.
The theory ignores saving or waiting as a source or means of investible funds. To part with liquidity without there being any saving is meaningless.
The interest rate is not a pure monetary occurrence. Real forces like capital productivity and thriftiness play a very important role in the determination of the interest rate.
The interest rate is not solely governed by only liquidity preference, other factors exist.
The theory handles all non-money financial assets as
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