ABSTRACT
The ultimate independent variables of the Keynesian system are, in Keynes' own words, the following: "1. the three fundamental psychological factors, namely, the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital assets; 2. the wage-unit as determined by the bargains reached between employers and employed; and 3. the quantity of money as determined by the action of the central bank ... " 1These variables determine national income and employment roughly in the following way:
lfwe initially assume national income to be given, the level of the interest rate will be determined by the curve reflecting the demand for cash at different rates of interest (the liquidity preference schedule) and by the given money supply. The interest rate, together with the marginal efficiency ofinvestment 2, determines the volume of investment. The volume of investment together with the consumption function (on which the multiplier depends) determines national income (and employment). If this national income is the same as that which we initially assumed as given, the system is in equilibrium and the interest rate is the equilibrium rate of interest. If, however, the resulting national income is larger or smaller than that with which we started, the liquidity curve will shift, and consequently the interest rate and the volume of investment will change, until the system reaches an equilibrium position.
