Keynesian Liquidity Preference Framework Essay Example | Topics and Well Written Essays - 750 words

Keynesian fluidity Preference Framework - Essay Exampleaside from this optimistic approach there will be some negative characteristics of high money egress like, it will hike the pompousness rate up to an optimal level (Fontana 31). Lets say the treasury printed so much in Federal Reserve Bank (FED) which made every American a millionaire, later the retirement of everyone, there would be no more workers or servants left to do the biddings which urges the industries to attract muckle by raising their wages. This of course is the essence of splashiness so persistency in spending the money would be required to everywherecome the circumstances which may arise repayable to higher money supply and we can say that its a best cure of recession. A recession will change in depression if a Liquidity Gap occurs in it. A liquidity gap is when people hoard money and refuse to spend, no matter how much the government tries to expand the money supply. There atomic number 18 ample reasons why people hesitate to invest the money it can be a consumer loss of confidence on the economy probably due to stock market crash or the law and order situation in the country, natural disaster like earthquake or hurricane are excessively the major cause which abate the spending of the money in the country, although saving is a good thing but it is non viable if spending and coronation are not on an adequate level.You know Wars are good for economy (it must astonish you) almost all the economist agree that gentlemans gentleman War II cured the great depression because the U.S finally began massive spending on defense. Social Programs are much more preferable over the ways to avoid depression. The success of Keynesian economics can be evaluated by having a glance over the recession periods. In U.S, before the creative activity War II, eight recessions worsened into depression which happened in (1807, 1837, 1882, 1893, 1920, 1933 and 1937) and since world war II there have been nine recessions under Keynesian policies happened in (1945-46, 1949, 1954, 1956, 1960-61, 1970, 1973-75, 1980-83, 1990-92) and not a single recession turned into a depression. Richard Nixon who was the 37th president of the United States (1969-1974) once declared that We are Keynesians now shows the importance of Keynesian Liquidity Preference Theory.As mentioned earlier savings is a must for the economy. According to Keynes saving is equal to investment means every dollar which is saved is eventually utilized as an investment in the economy (Keynes 150). Now the concept of money supply and price level effect comes into place if the economy reaches on an optimal level then people become less interested to invest and under this influence price level increases because the income level also increases. In liquidity preference framework, Keynes (211) states that the money demand can be equated with the term Marginal Efficiency Unit (MEU). Keynes further apprises that nothing will induce the people to invest money if they are on a consensus that the economy is on its peak point from where the prices of the commodities begin to rise and result in increasing the inflation rate up to a vulnerable position (Handa, 511). The industry which badly gets hurt from this jeopardous situation is the banking industry because