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What did Keynes say the Classical postulates were? Illustrate each using the IS-LM model.

  1. What did Keynes say the Classical postulates were? Illustrate each using the IS-LM model.

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Keynesian criticism of the Classical postulates implies one; wage bargaining determines real wage which was refuted as there is a difference between nominal wage and real wage and what workers might stipulate is nominal or money wage. Secondly, if real wage varies with wage bargaining then it will also be assumed that price changes in the same proportion as nominal wage to make real wage constant but the latter were a part of quantity theory of money so the former was only taken into consideration.

The IS-LM models explain the Keynes theory in terms of relationship between Y (output) and r(rate of interest) where the IS curve is based on the assumption that I=S.i.e investment equals saving and LM curve is based on the equilibrium between liquidity preference curve and money supply.

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