Question

The primary criticism Keynes leveled against Fisher’s theory of money demand is the prediction that the velocity of money is constant. Keynes stated that the data on velocity showed unambiguously that velocity fluctuated significantly in the short run. Explain how Keynes’ theory of money demand allows for such short run fluctuations.

Answer 1

Keynes explained the asset motive through what he termed speculative demand.in this theory he argued that demand for money is a choice between holding cash and buying bonds.if Interest rates are low then people will tend to expect rising Interest rates and therefore a fall in the price of bonds.in this case demand for holding wealth in the form of money will be higher. If Interest rates are high and people expect Interest rates to fall then there is likely to be greater demand for buying bonds and less demand for holding money. Keynesian economist generally argue that aggregate demand is volatile and unstable.they purpose that a market Economy often experience inefficient macroeconomics outcome in the form of Economic recession and inflation and that these can be mitigated by Economic policy response.