Editing Keynes effect

{{refimprove|date=June 2013}}

The '''Keynes effect''' is the effect that changes in the [[price level]] have upon goods market spending via changes in [[interest rates]]. As prices fall, a given [[Real vs. nominal in economics|nominal]] [[money supply]] will be associated with a larger [[Real vs. nominal in economics|real]] money supply, causing interest rates to fall and in turn causing [[investment]] spending on [[physical capital]] to increase.
<ref>{{cite web
 |url        = http://economics.about.com/library/glossary/bldef-keynes-effect.htm
 |title        = The Keynes Effect
 |work        = 
 |accessdate        = 2013-05-09
 |archive-date        = 2013-05-11
 |archive-url        = https://web.archive.org/web/20130511105123/http://economics.about.com/library/glossary/bldef-keynes-effect.htm
 |url-status        = dead
 }}</ref>

This implies that insufficient demand in the product market cannot exist forever, because insufficient demand will cause a lower price level, resulting in increased demand.

There are two case in which the Keynes effect does not occur: in the [[liquidity trap]] (when the [[LM curve]] is horizontal and thus changes in the real money supply do not affect interest rates), and when expenditure is [[Elasticity (economics)|inelastic]] with respect to (unresponsive to) interest rates (when the [[IS curve]] is vertical). The [[Pigou effect|Patinkin-Pigou real balance effect]] suggests that due to wealth effects of changes in the price level upon spending itself, insufficient demand cannot persist even in the two cases in which the Keynes effect does not operate.

==See also==
*[[Pigou effect]]
*[[John Maynard Keynes]]

== References ==
{{Reflist}}

{{DEFAULTSORT:Keynes Effect}}
[[Category:Keynesian economics]]
[[Category:Economics effects]]


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