Question

1) Analyse the effects of an increase in the money supply on the level of real income, the price level, the interest rate and the money wage within the Keynesian system variable price-fixed wage. Compare the effects with those in the variable price-variable money wage model. Why the money wage does not adjust proportionately? What are the reasons?

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Answer 1

Keynes argued that interest rate can also be decreased by increasing the supply of money.A flexible wage policy is competent of maintaining a situation of continuous full employment.
According to Keynes,there is increase in money supply when unemployment wages will remain constant.the Marginal Cost curve(which is flat) moves to the right,having prices and profits unchanged.In a full employment situation, prices will be in parallel to money supply.Also wages give a progressive respond with increase in money supply.
Money suppy will increase proportionately with the price level variably changes.With tge increase in price level,the supply of output also increases.
money supply's increase leads to aggregate demand's increase .This increase in demand leads to increase in price level.Which in turn reduces the real wage.Increase in aggregate demand leads to an increase in level of output and increase in price level.
In a state of full employment where actual output is equal to potential output,here output is not a function of price.As price changes money wage change proportionately the real wage do not change.