Keynes's critique of the quantity theory of money:
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Keynes’ great merit lies in removing the old fallacy that prices are directly determined by the quantity of money. His theory of money and prices brings forth the truth that prices are determined primarily by the cost of production.
Keynes does not agree with the old analysis which establishes a direct causal relationship between the quantity of money and the level of prices. He believes that changes in the quantity of money do not affect the price level (value of money) directly but indirectly through other elements like the rate of interest, the level of investment, income, output and employment. The initial impact of the changes in the total quantity of money falls on the rate of interest rather than on prices.
Keynes does not agree with the old analysis which establishes a direct causal relationship between the quantity of money and the level of prices. He believes that changes in the quantity of money do not affect the price level (value of money) directly but indirectly through other elements like the rate of interest, the level of investment, income, output and employment. The initial impact of the changes in the total quantity of money falls on the rate of interest rather than on prices.
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