| Background | Keynesian Economics or Theory is an economic theory developed by John
Maynard Keynes (183-1946), a British Economist.
The term “Keynesian Economics or Theory” was named after John Maynard
Keynes.
Keynes developed this economic theory in an attempt to understand the Great
Depression in 1930s.
The ideas of this economic theory were written in Keynes’ writing titled “The
General Theory of Employment, Interest, and Money”.
Keynesian Economics was based on the circular flow of money.
Keynesian Economics is one of the three main schools of thought in
macroeconomics (Classical, Keynesian, and Monetarist). |
| Basic Rules | a. If Aggregate Demand is greater than Aggregate Supply, the output grows,
economy grows, and unemployment falls.
b. If Aggregate Demand is less than Aggregate Supply, output falls, economy
shrinks, and unemployment rises.
c. If Aggregate Demand is equal to Aggregate Supply, economy is in equilibrium. |
| Aggregate Demand | the total demand for all goods and services in an economy |
| Aggregate Supply | the total supply for all goods and services in an economy or
TOTAL PRODUCTION IN AN ECONOMY. |
| Ideas of Keynesian Economics | 1. National income depends on the amount of employment.
2. The marginal propensity to consume is less than 1.
3. Employment results from consumption and investment.
4. The system rests, in equilibrium, with excess capacity.
5. Employment could be increased if workers accepted lower wages, because it would make lower investments by business profitable, but wages are sticky.
6. To increase employment and achieve full employment, spending must be increased.
7. All spending is equal.
8. Since consumer spending and investment are stuck, the government must increase spending to restore full employment.
9. All spending is subject to a multiplier effect.
10. The government can supplement spending until full employment is reached without inflation |
| Ideas of Keynesian Economics | 11. Once full employment is reached, additional spending, will cause inflation.
12. Private Laissez Faire investment cannot produce the necessary investment to
maintain full employment.
13. Monetary policy, influencing interest rates, alone, cannot regulate investments
necessary to maintain full employment.
14. Direct central controls of long term investments by the state is necessary to ensure
full employment. |
| PL | – Price LeveL |
| AD | – Aggregate Demand |
| LRAS | – Long Run Aggregate Supply |
| Aggregate Demand includes: | Consumption
Investment
Government Spending
Net Exports |
