ABSTRACT
Introduction It is not a difficult problem to extend the general equilibrium analysis of the last chapter to allow for the fact that production and employment are in general variable and subject to major economic decisions. In the perfectly competitive picture of the economy each factor of production will enter into a market situation and the equilibrium conditions in the extended economy will involve conditions relating to the optimal allocation of productive resources amongst alternative occupations as well as conditions relating to the equilibria of spending units. The details will not concern us here for we shall continue to work with a highly aggregative picture of the economy, as we did in the latter part of the last chapter. Here we allow the level of employment and production to be determined by economic decisions rather than held fixed as before. We shall find that it is possible to picture the economy such that the role of money in relation to the general price level is not substantially different from its role in the last chapter. To this picture Keynes took great exceptiorf The nature of his objections will receive attention as we proceed, and we shall examine the manner in which the general price level is determined in a fairly simple scheme that is representative of much analysis in the earlier Keynesian vein.
