## Keynes Equation

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# Keynes’ Equation

It has been mentioned earlier that J.M. Keynes also belonged to the Cambridge School, but as he was not satisfied with the equation of Prof, pigou he presented his own equation known as the Real Balance Quantity Equation. His equation is as follows:

n = PK

P = n / K

where n is the total supply of money in circulation,

P is the general price level of price of consumption goods,

K is the total quantity of consumption units which the people decide to keep in the form of

cash. In other words, K indicates those consumption units for which the purchasing power

is kept by the public in the form of cash. Keynes refers to K as the real balance.

In this equation so long as K remains unaltered, a change in n cause a direct proportional change in P.

Keynes further enlarged his equation so as to include bank deposits in money. The new enlarged Keynesian equation is as follows:

n = P (K + rK’)

P = n / K + rK’

where n is the total supply of money, i.e., the total amount of currency plus bank deposits,

r represents the proportion of cash reserves of banks to deposits.

K is the total quantity of consumption units which the people decided to keep in the form of

cash, and

K is the number of consumption units which the public keeps in the form of bank despots.

Assuming K, K’, r to remain constant, the conclusion that n and P rise and fall together follows. The proportion between K and K’ is determined by the banking arrangements of the public and their absolute value is determined by the habits of the people. The value of r, would depend upon the practices followed by the banking system regarding maintenance of reserves. So long as these values remain unaltered, a direct relation between the supply of money (n) and the price level (p) remains an established fact.

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n = PK

P = n / K

where n is the total supply of money in circulation,

P is the general price level of price of consumption goods,

K is the total quantity of consumption units which the people decide to keep in the form of

cash. In other words, K indicates those consumption units for which the purchasing power

is kept by the public in the form of cash. Keynes refers to K as the real balance.

In this equation so long as K remains unaltered, a change in n cause a direct proportional change in P.

Keynes further enlarged his equation so as to include bank deposits in money. The new enlarged Keynesian equation is as follows:

n = P (K + rK’)

P = n / K + rK’

where n is the total supply of money, i.e., the total amount of currency plus bank deposits,

r represents the proportion of cash reserves of banks to deposits.

K is the total quantity of consumption units which the people decided to keep in the form of

cash, and

K is the number of consumption units which the public keeps in the form of bank despots.

Assuming K, K’, r to remain constant, the conclusion that n and P rise and fall together follows. The proportion between K and K’ is determined by the banking arrangements of the public and their absolute value is determined by the habits of the people. The value of r, would depend upon the practices followed by the banking system regarding maintenance of reserves. So long as these values remain unaltered, a direct relation between the supply of money (n) and the price level (p) remains an established fact.

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