What Is The Keynesian Theory Of Business Cycles?
The Keynes theory of business fluctuation was developed during the great depression of the 1930s. It was in response to the classical theory that the economy is self correcting. The classical economists were of the view that if at any time excessive unemployment occurs in the economy, market forces automatically restore the economy to its full employment level in the long run. According to the Keynes in the short run, the level of income, output and employment is determined by the level of aggregate effective demand. Aggregate demand is composed of demand for consumption goods and demand for investment goods. If the aggregate demand is low, then smaller amount of goods and services will be produced. A lower level of aggregate demand thus results in smaller output, come and employment. J.M Keynes is of the view that it is the changes in the level of aggregate demand which bring about fluctuations in the level of income output and employment. The fluctuations in economic activity are due
