chapter  6
15 Pages

Money and effective demand

ByVictoria Chick

In Post Keynesian theory we are accustomed to drawing an aggregate demand curve which slopes upward in a space defined by the value of output (PQ, price times quantity of output) and the amount of employment (N). It is plausible enough: a rise in employment should surely imply a rise in total expenditure. However if we compare the aggregate demand curve of the neoclassical synthesis, we find it is downward sloping in P, Q space. Since N and Qare positively related, prices must fall as employment increases. By contrast, in Post Keynesian theory we either assume that costs and prices are constant as output and employment rise or that prices rise as output rises to cover rising costs. There is a simple explanation of the difference, contained in the basic message derived from the work on the finance motive and endogenous money: that a rise in effective demand is accompanied, in Post Keynesian theory, by a rise in the money supply. By contrast, aggregate demand in the neoclassical synthesis is based on the assumption that the money supply is fixed. Unless there is some compensating variation in velocity, then a rise in Q entails a fall in P.