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In: Economics

Per the Keynesian approach, explain how the economy reaches full employment.

Per the Keynesian approach, explain how the economy reaches full employment.

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Expert Solution

Keynesian theory :

According to Keynes there is no full employment exist in the economy. Full employment is just a temporary situation and a special case.

Keynes’s employment theory is based on the principle of effective demand.

Effective demand is the total demand for goods and services at different levels of employment. In Keynesian economy effective demand determines the level of employment in the economy.

If effective demand increases that means employment is also increasing and if effective demand is decreasing that means unemployment is increasing.

Effective demand is the point where demand price is equal to supply price in the economy. The intersection point of demand price and supply price decide level of output and employment in the economy.

    The point of effective demand represents underemployment equilibrium.

According to Keynes the equilibrium in the economy will be established at less than full employment due to liquidity trap, wage rigidity and interest inelasticity of investment etc.

Rahul Sunny answered 1 year ago
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