Keynesian Theory and Policy

This paper provides an introduction to Keynesian macroeconomic theory as Keynes explained it in The General Theory of Employment, Interest, and Money. Keynes emphasized the principle of effective demand, and argued that the gap between demand for consumption and aggregate supply would increase as the volume of employment increased. Full employment requires that this gap must be filled by investment and government spending on goods and services, and there is no automatic market mechanism to assure full employment. Keynes opposed a policy of wage cuts to restore full employment because they had not been effective and because they were painful. Expansion of the money supply to restore full employment was also regarded as ineffective under depression conditions of the early 1930s