Keynesian Economics

Keynes
Topic Outline:
 Introduction
 Great Depression & Keynesian Revolution
 Keynesian Labor Market
 Keynesian “AS” curve
 Keynesian “AS/AD” curve together
 Two way of determinant of Keynesian Equilibrium
 Keynesian Consumption Function
Introduction
The 1930s marked as the first stirrings of the
science of Macroeconomics, founded by John
Maynard Keynes as he tried to understand the
economic mechanism that’s produced by the Great
Depression. Macroeconomics actually focuses
the aggregate change in the economy.
Great Depression & Keynesian Revolution
The “Great Depression” (1929-1939) was the world wide, longest-
lasting economic downturn in the history of the Western
industrialized world. It was the deepest and most widespread
depression of the 20th century.

Causes of Great Depression:

 Stock market crash of 1929
 Bank failures
 Reduction in purchasing across the board
 American economic policy with Europe
 Drought conditions
 The history of modern macroeconomics starts in 1936, with
the publication of Keynes’s “The General Theory of
Employment, Interest, and Money”.

Keynesian follows the basic assumptions:

 Economy may not be in full employment.
 Wages are rigid and prices are sticky.
 They have faith in fiscal policy.
 Aggregate supply is upward sloping.
 There is no automatic self-adjusting character of
the economy.
 Money is dynamic.
Keynesian Labor Market
According to Keynes, the labor market is inflexible because
a variety of factors prevent money wages from falling, when
unemployment exist.
Keynesian “AS” curve
Keynesian “Aggregate Supply” curve is horizontal
below full-employment output.

AS curve

Price P
level
O f

Income (output)
Keynesian “AS/AD” curve together

AD` AD`` AS curve

Price level P e

O y f
Income (output)
Determinant of Keynesian Equilibrium
In Keynesian model, equilibrium is achieved
when:
 Y = AE
S=I
Simple Keynesian Income Determination Model
Keynesian consumption function can be written as:

Y=C+I
C = a + cY; a > 0; 0<c<1