ABSTRACT
Two key assumptions made by writers discussed in the last lecture were rejected by Keynes in the General Theory. He did not accept that the economy tends towards full employment in the relevant time period, nor that velocity (or the Cambridge k) is a stable function (or a constant determined by technical conditions). The level of output is determined by effective demand (which is influenced by monetary factors) and the demand for money is a demand for one form of asset and that demand depends on expectations about future movements in prices of other assets. This is a sharp departure from the quantity theory tradition, particularly as developed by Irving Fisher. This tradition emphasised that expectations influenced the demand for money, but the expectations in question concerned movements in the price level, and therefore expectations about the purchasing power of money. Keynes, on the other hand, placed emphasis on expectations about interest rates – the yields on assets competing with money.
