ABSTRACT
The main points to emerge from the theoretical and empirical work on the demand for real cash balances are the importance of the rate of interest, the importance of either current or permanent income and the unimportance of the rate of inflation. In addition it appears that the Keynesian postulates of the liquidity trap and money illusion in the speculative demand function are not supported by the empirical evidence. However, if we accept the general demand for real cash balances function shown in equation 11.58 it is clear that we are still able to derive an upward sloping LM curve and all the policy conclusions derived in section 1 are unchanged. https://www.w3.org/1998/Math/MathML"> M d / P = g ( R, Y, W ) https://s3-euw1-ap-pe-df-pch-content-public-p.s3.eu-west-1.amazonaws.com/9781315677064/4146b8d7-0150-4623-8d8b-5d80a5d87c5b/content/math433_B.tif" xmlns:xlink="https://www.w3.org/1999/xlink"/>
One feature of this formulation is that, like the traditional Keynesian view, the velocity of circulation of money is effectively determined by the market rate of interest and in general cannot be assumed to be constant.
