Question

Keynes appears to move away from Marshall's synthesis of supply and demand by emphasizing effective demand as determining unemployment. What is Keynes’s theory of effective demand, consumption, and the multiplier? In what ways is Keynes's theory of unemployment reminiscent of Smith's explanations for the pace of accumulation? Ricardo’s? Marx’s? How is Keynes's theory of demand consistent with Marginalist Subjectivism? In what ways does Keynes break entirely new ground (new paradigm)?

Answer 1

Ans ) The aggregate demand AD refers to the total demand for goods and services in an economy : It consits of 1) Consumption demand by household 2) Investment demand that is demand for capital goods 3) Government expenditures 4) Net income from abroad ( X- M) ..Keynes argued that economy equilibrium level of output and employment may not correspond to full employment level of income.Keyne's. theory of the determination of equilibrium income and employment focuses on the relationship between aggregate demand and aggregate supply Thus ,equilibrium level of income and employment is the level at which aggregate supply is consistent with the current level of aggregate demand .Hence according to Kynes equilibrium level of employment is determined by the level of effective demand . The higher the effective demand ,greater will be the level of income and employment.The Keynesian multiplier was introduced by Richard Kahn in 1930..It demonstrated that any government spending brought about cycles that increased employment and prosperity..For example a government spending of $100 million to build a dam might pay $ 50 million to direct Labour costs the workers less saving spent on consumption the business have more money as a result of consumption of labourers and the businesses in turn hire more labours for increasing production this is multiplier approach hence Keynesian wanted to tax savings and increase spending .In the long run there is great deal of agreement between Classical School and Keynesians .Classical economists believed that markets adjusts fairly quickly ,when recession begins businesses can't sell all tat they produce and will lower prices on goods and services hence unemployment rises and. also capital accumulation decreases so workers lower their wages to make business to hire them again .Thus wages and prices adjust them in such a manner that the recession can be short lived. Keynes on the other hand on short run believed that by increasing government spending aggregate demand can be increased but in long run economy will adjust itself

.The Keynesian theory of employment and income is explained in terms of aggregate supply I.E cunsumption + savings and aggregate demand I.E Consumtion + investment .Employment and income can be increased by increasing aggregate demand and aggregate demand can be increased by increasing investment also once investment increases ,employment and income increases .Increase income lead to rise in the consumption of goods and services which lead to further increase in employment and income once set it will result into multiplier effect. Till equilibrium level is achieved.