THE DIFFERENCES BETWEEN MODERN ECONOMIC

AND CLASSIC ECONOMIC BY KEYNES THEORY

(MACROECONOMICS)

Lecturer :

Irvan Yoga Pardistya, SE., MM., Ak

AHNAF TAQIY ROBBANI 

1610631030015

ACCOUNTING – A8

ECONOMIC & BUSINESS FACULTY

UNIVERSITY OF SINGAPERBANGSA KARAWANG

October 2016

PREFACE

Al-hamdulillahi rabbil'alamin, thanks to Allah s.w.t., which has given grace to the author, so it can complete the task this macroeconomics. Thanks to Mr. Irvan Yoga Pardistya, SE., MM., Ak who has provided a valuable lesson to the author of Macroeconomics. Thanks to my parents who have given strong support to the author.

Hopefully we as a student at the "State University Singaperbangsa Karawang" can work more professionally by using English as a second language whatever we do. thanks.

                                                                                     
                                                                                                             AHNAF  TAQIY  R.
                                                                                                                    1610631030015

Table of Contents

Preface .................................................................................................................................

Contents ..............................................................................................................................

Reference .............................................................................................................................

Money

Definition and Understanding

From the fact that there are :

some economists argued about the meaning of money, including the following :

1.   Roberson said that the money in his Money is anything that is generally accepted in payment of goods.

2.   R.S. Sayers in his book Modern Banking said that the money is anything that is generally accepted as payment of debt.

3.   A.C. Pigou in his book the Veil of Money states that money is everything that is commonly used as a means of exchange.

4.  Rolling G. Thomas in his book Our Modern Banking and Monetary System defines money is everything ready and is generally accepted in payment of the purchase of goods, services and to repay debt.

So, from an economic standpoint, money is the stock of assets used for the transaction. money is something that is accepted / public trust as a means of payment or transaction. therefore money can be anything, but it does not mean everything is money.

Demand for money

A theory that explains the demand for money can be divided into classical theory and the theory keynes.

1)    classical theory of money demand

the amount of money requested inversely proportional to the level of output or income. When the output level increases, the demand for money increases, and vice versa.

(M/P)ᵈ = k.Y

            Where:

            (M/P)ᵈ  = demand for real money nominal               Y        = income or output

              M       = nominal value of money                             P        = the price level

              K       = the proportion of money demand to income or output

because it serves as a medium of exchange, then the money is money neutrality, in the sense of money only affects the price level. The opinion expressed in classical quantity of money, proposed by Irving Fisher.

M x V = P x T          Where :

    Or                    M = the amount of money in circulation      P = the general price level

MV= PT               V = velocity of money                           T = the number of unit transactions

2)    Keynesian theory of money demand

by keynes there are three motivations that people hold money, the transaction motive, precautionary motive, and the Speculation motive.

a.     Transaction motive

demand for money for transactions in theory keynes is equal to the demand for money in the classical theory. people holding money in order to facilitate activities of daily transactions. demand for money for transaction positively related to income level. when income increases, the need for money for transaction purposes increased.

b.     Precautionary motie

he demand for money as a precaution also positively related to income level; if incomes rise, the demand for money as a precaution also increased.

because the demand for money for transactions and related precaution in line with the level of income, then the relationship can be expressed as follows.

        M_t = f(Y)                     Where :

                                             M_t = demand for money for transactions and precaution

                                              Y = Income

c.     Speculation Motive

keynes develop this theory is based on the assumption that money is one of the two financial assets that can be owned by the community. Other assets are bonds, ie bonds with a pledge of providing interest income. keynes dimasksud types of bonds are bonds with maturities not limited (consol bond) and have no risk of failing billed (default).

the advantages of holding cash is the perfect liquidity; whenever you need it, when it can also be used for the transaction.

        M_sp = f(r)           Where :          

                                   M_sp  = demand money for speculation

                                      r   = interest rate

so that the total demand for money

M^D= M_t + M_sp                Where :

      = f (Y,r)                 M^D  = the total demand for money.

     

Comparison between Classical and Keynesian Economic Theory

Classic theory :

On the Goods Market

a.)     There can be no excess / deficiency in production

b.)     Society's total production = total needs of society (full employment level of activity)

The cornerstone of his thinking :

·         Say's Law: supply creates its own demand

·         General price flexibility

·         Each production process has two

Result :

a. generate output

b. provide income

·         All income is spent on goods market

·         No need government intervention

In the Money Market

Ø  The principle of the quantity theory of money: money is only for the transaction.

Ø  Offers of money is determined by the government

Ø  The balance in the money market: MS = MD = kPQ

In the Labor Market

a.)     Flexible wage level                                   c.)     Always full employment

b.)     No need government intervention in addressing unemployment

Keynesian Theory

On the Goods Market :

Ø  Can avoid excess / deficiency in production

Ø  Not always achieve full employment

The cornerstone of his thinking :

a.)    Not accepting Say's law                                             d.) Need government intervention

b.)    Same with the opinion of the classic                          e.) General price rigid

c.)    Not all income is spent, there are some who saved

In the Money Market

Ø  There are three motives of holding money: (1) for the transaction; (2) As a precaution; (3) speculation.

Ø  Offers of money is determined by the government

Ø  Balance: MS = MD = [k + θr] P

In the Labor Market

Ø  Rigid wage level

Ø  Not always full employment

Ø  Need government intervention in addressing unemployment

      

REFENCE

Prathama rahardja dan mandala manurung, 2014.Teori Ekonomi makro edisi 5. lembaga penerbit Fakultas Ekonomi Universitas Indonesia,jakarta.

 Rowland Bismark Fernando Pasaribu.Teori Ekonomi II.Universitas Gunadarma
( https://rowlandpasaribu.files.wordpress.com/2014/03/pertemuan-03-dan-04-teori-ekonomi-klasik-vs-keynesian.pdf)