ABSTRACT
THE KEYNESIAN savings-investment theory, alternatively called the theory of effective demand, is the heart of modern monetary analysis. Here we see a complete break with the classical tradition. Traditional preoccupation with individual prices and quantities on the tacit assumption of stability of aggregate demand has given way to a new theory of output and employment as a whole based on the more realistic assumptions of unstable aggregate demand and underemployment savings-investment equilibrium. Investment is no longer seen to be unlimited at low rates of interest, but is seen to depend on the level of income, the marginal efficiency of capital, the propensity to consume, and other factors largely outside the price system. Keynes formulated a simple but powerful analytical tool, namely, the income-expenditure analysis expressed in the fundamental equation Y = C + I (the economics counterpart of Einstein’s equation E = mc2 that has led to the development of atomic science). The next few chapters will be devoted to the explanation and qualifications of the variables of this equation. The subsequent analysis will show why Y has been chosen as the central variable.
