By Brendan Sheehan (auth.)
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Extra info for Understanding Keynes’ General Theory
5 To answer this it is helpful to begin by making some simplifying assumptions. 7 Q = f (K, N) (3) In this equation N represents labour units, K is the given stock of capital equipment and Q is the total output. This production function, however, must have the distinctive characteristic that any tendency for diminishing productivity to set in as output increases is attributed to the increasing inefﬁciency of the capital stock. This means that the productivity Aggregate Effective Demand 43 of labour units (both average and marginal) remains the same as output increases.
D) Keynes versus the classics revisited In the General Theory Keynes makes continual reference to classical macroeconomics as a special case, one that applies in certain limiting circumstances, to which he adds his more generally applicable theory. Mainstream Keynesianism sees the distinction between Keynes and the classics in a very different way; Keynes’ theory is viewed as a special case of the classical (or neo-classical) model, applicable in the short run, when price expectations have not fully anticipated an unexpected shock, but giving way to the classical case in the long run.
Furthermore, if the velocities of income deposits and business deposits differ (as is likely) this further complicates the position, as changing the proportions of such deposits held by the public causes further variations in the value of the overall velocity. Finally note how in this numerical example the price-level changes without any change in the overall money supply. The Fisher equation is obviously seriously ﬂawed once the role of money as a store of value is taken into account. For if the overall value of the velocity ﬂuctuates due to monetary forces, the equation can no longer say anything unambiguous about the effect on the price-level of a change in the quantity of money.