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The Keyensian view on money demand argues that it is impossible to predict the velocity of...

The Keyensian view on money demand argues that it is impossible to predict the velocity of money. Explain why this is the case.

Thank you in advance.

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Answer #1

Keynesian economists argue that money is demanded for following purposes:

  • Transaction purpose.
  • Contingency Purpose
  • Speculative activities.

Classical economists did not consider the speculative activities. Hence, keynesians believe that money demand for speculative activities is critical determinant of velocity of money.

Rise in money demand for speculative activities leads to the decrease in velocity of money and conversely, fall in money demand for speculative activities causes increase in velocity of money.

Thus, it is difficult to correctly predict behavior of velocity of money. Velocity of money is not constant as has been assumed by classical economists. Velocity of money keeps on changing and it is relatively difficult task to predict its movements.

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