This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand. The theoretical framework is a two-period general equilibrium model in which prices are sticky in the short run and flexible in the long run. Policy is evaluated by how well it raises the...

Based on an analysis of a modified version of the standard Keynesian Model of a product market, it is shown that a change in the average tax rate has a complex effect on aggregate demand. Since the parameter of marginal propensities to purchase is easily regulated, by selecting its appropriate...

We construct a model to capture the Keynesian idea that production and employment decisions are based on expectations of aggregate demand driven by sentiments and that realized demand follows from the production and employment decisions of firms. We cast the Keynesian idea into a simple model...