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1) Compare and contrast the way Classical and Keynesian theory determine the Demand for Money and...

1) Compare and contrast the way Classical and Keynesian theory determine the Demand for Money and how it is related to the Money Supply. As a part of your comparison, indicate which of these theories developed the concept of a Liquidity Trap and what this does to the Demand for Money as part of that theory.
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Answer #1

In the classical model of the macro economy regards rate of interest to be the equilibrating mechanism between saving and investment. They make an assumption that in the long run aggregate supply curve is inelastic; thus any deviation from full employment will only be temporary. On the other hand, Keynesian model, regards changes in income to be the equilibrating mechanism between saving and investment. It place main role for expansionary fiscal policy (government intervention) to overcome recession.

Liquidity trap occurs when the expansionary policy does not have an impact on the interest rate and income, thus the simulated economic growth is not possible. Since Keynesian includes all three motives-transaction, speculative and precautionary demand, thus provides a best description on the liquidity trap

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