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The Monetary Theory of Real Activity

In: Keynes’s General Theory, the Rate of Interest and ‘Keynesian’ Economics

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  • Geoff Tily

Abstract

Keynes’s theory of real activity provides an explanation for both the level of activity and the economic cycle. The theory is a monetary theory from three perspectives. First, the most important determinant of the level of activity is the monetary rate of interest. Second, the level of activity determined by the rate of interest and expectations is facilitated by bank money. Third, an unsustainable level of activity is reflected in an accumulation of debt and asset price inflations, and is ultimately restrained by the prospect and then reality of financial collapse. As has been noted in earlier chapters, this latter argument (in Sections 8.4 and 8.5) goes beyond Keynes’s argument in the General Theory.

Suggested Citation

  • Geoff Tily, 2007. "The Monetary Theory of Real Activity," Palgrave Macmillan Books, in: Keynes’s General Theory, the Rate of Interest and ‘Keynesian’ Economics, chapter 8, pages 226-248, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-80137-0_8
    DOI: 10.1057/9780230801370_8
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