chapter  Lecture 19
26 Pages

Additional General Reflections on Keynesian Economics II. The Price Level in Money Terms.

The most significant conclusion of Keynesian theory is that for a given technology the volume of autonomous personal consumption, government consumption, and investment, together with the real wage-rate, determine the level of production. Since firms are free to set the price of their products, shifts in money wages can be expected to lead to shifts in the price level; only an analysis of the forces determining the price level can tell people what real wage level will emerge. The chapter focuses on the motives determining a manufacturer's price policy. The increasing tightness of money in the period under consideration seems to have exerted little if any downward influence on the course of prices. The price-level being given, the operation of the economy requires a certain amount of cash; if the total amount of money available sinks below this level, manufacturers may be forced to postpone intended purchases, leading to a curtailment of demand and a fall in the price level.