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In: Economics

J.M keynes in the general theory of employment, interest and money said, "the propensity to consume...

J.M keynes in the general theory of employment, interest and money said, "the propensity to consume and the rate of new investment determine between them the volume of employment (in an economy). "how was this different from the classical theory that prevailed before this? what did keynes focus on that completly revolutionized economic thinking forever? use the keynesian cross diagram to explain your answer and then explain why keynes theory and particularly his policy is even more relevent that ever to todays COVID depression.

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Expert Solution

Keynesian General theory of employment, interest, and money completely revolutionized the Macroeconomics. Keynes stressed on the importance of investment and propensity to consume as the key determinants of employment and output.

Keynes does not agree with classical economists who say that full employment is a general condition and the government does not need to make any intervention in the economic activities.

In the face of COVID-19, the aggregate demand is likely to decrease massively over the short span of time. Thus, the importance of Keynesian prescriptions has increased significantly.

Following is the diagram:

In the above diagram, The AD fell to the AD2 after the spread of COVID-19 pandemic. Here , Income also has decreased to the level of Y2 thereby signifying the rise in the unemployment rate.

Such case of unemployment and reduced output can be tackled through the keynesian prescription where government needs to increase the expenditure to cause rightward shift in the aggregate demand that would cause the rise in the employments and output level.


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