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Money Money: Keynesian Roi Determination

The document summarizes Keynes' liquidity preference theory of interest rate determination. It explains that the interest rate is determined by the intersection of the liquidity preference curve (demand for money) and the money supply curve, not by a return on investment. The liquidity preference curve is negatively shaped by speculative demand for money and positioned by transactions demand for money. Changes in money supply or demand will cause the interest rate to adjust at the point where the curves intersect.

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Rajat Jadhav
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42 views3 pages

Money Money: Keynesian Roi Determination

The document summarizes Keynes' liquidity preference theory of interest rate determination. It explains that the interest rate is determined by the intersection of the liquidity preference curve (demand for money) and the money supply curve, not by a return on investment. The liquidity preference curve is negatively shaped by speculative demand for money and positioned by transactions demand for money. Changes in money supply or demand will cause the interest rate to adjust at the point where the curves intersect.

Uploaded by

Rajat Jadhav
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Keynesian RoI Determination = Liquidity Preference Theory

Money

Supply Demand

It is determined as per
the requirements of the
economy and not by RoI
Active Cash Idle Cash
SSm
RoI
Balance Balance
Transactionary Speculative
Motive Motive
Precautionary
Mo
Sm
Motive
The SSm is Perfectly DACB = f (Y) DICB = f(i)
RoI Inelastic
Keynesian RoI Determination (LPT) - continued
The LP curve is SHAPED -vely by DICB
Demand for Money
As DICB = f (RoI),
When RoI increase, less money will be
demanded for speculation
When RoI decrease, more money will
RoI be demanded for speculation

The LP curve is POSITIONED by DACB


DY2
As DACB = f (NI),
DY1
An increase in NI will lead to an increase in
the demand for money and so the Liquidity
Preference curve will shift upwards to the
right
A decrease in NI will lead to a decrease in
LP2 the demand for money and so the
Liquidity Preference curve will shift
LP1 downwards to the left

Dm
Keynesian RoI Determination (LPT) - continued
RoI is determined at the point
• R
where the LP curve intersects the
oI SSmo SSmn Supply curve of money
LP2

LP1 If the demand for money increases (LP1


to LP2) and supply of money is constant,
the RoI rises (i1o to i20) (i.e., E1o to E20)
i2o E2o

If the demand for money is constant


E2n and the supply of money increases
i2n
E1o (SSmo to SSmn) the RoI falls
i1o
(i1o to i1n) (i.e., E1o to E1n)
E1n
i1n
If both demand for money and
supply of money changes, then the
RoI changes accordingly

Moo Mon DDm; SSm

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