To see how his ideas helped Europe we will first look at each of his main theories and ideas. Then look at some examples of countries in Europe that his theories affected.
Liquidity Preference Theory.
Keynes said that people invest not because of the interest rate they receive, but because of the prospective capital gain of the investment, example, people buy shares, not so much for the annual dividend but for the prospective increase in the marked value of the share. He developed a theory known as the liquidity preference theory, this determined interest rates. The Liquidity preference theory can be explained as follows. It concentrates on the demand and supply of money rather than the demand and supply of lonable funds to explain how interest rates are determined. The supply of money was taken as fixed. It was the policy decision of the Central Bank, in accordance with the wishes of the government. It did not depend on the rate of interest. By the demand for money Keynes meant the preference people have for holding their asset or wealth in liquid or monetary form. Keynes wrote that there are three reasons or motives why people demand money.
(1) Transaction's Motive! Day to Day transactions, this motive is not related to the rate of interest. It directly relates to your level of income.
(2) Precaution Motive! This motive depends on your level of income and also the rate of interest. This is when people hold money in case of emergencies, for example illness, breakage of appliance, car repairs etc.
(3) Speculative Motive! The demand to hold money with a view to investing at some future date. This motive depends totally on the rate of interest. If rates are high, people will invest immediately and not hold the money therefore, at high rates of interest the speculative demand for money will be low, and at low rates of interest the speculative demand for money will be high.
Overall, as interest rates fall, the demand for money will increase.