Before 1936, it was believed that money does not affect real resources such as output of goods and services. But there were some problems in the 1930s that classical theory and policy were unable to deal with. John Maynard Keynes provided the first challenge to classical theory and published the General Theory of employment, interest, and money, which spanned the 1940s to the late 1960s. Then there came another revolution in economic thought and policy in the 1970s from monetarist economists, led by Milton Friedman. In this article, I will mention the factors which determine the demand for money function, comparing the difference of them between Keynes’s theory and Friedman’s theory. Keynes thought that transaction balances are determined by the level of income and by institutional factors, namely, interest rates. This was developed by Friedman. He thought the elements influencing demand for money are permanent or wealth, the level of price, interest rates, and the expected rate of inflation. And then, I will compare the transmission mechanism arising from this demand for money function with the Keynesian transmission mechanism.............. |
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