Keynesian economics

Keynesian economics explains fluctuations in output and employment through aggregate demand, especially when prices and wages adjust slowly. It supports stabilization policies that counter recessions and overheating.

Aggregate demand: Total planned spending on final goods and services in an economy at a given price level. Keynesian analysis treats short-run changes in total spending as a major driver of output.
John Maynard Keynes: British economist whose analysis of demand and unemployment reshaped twentieth-century macroeconomics. His work established the central arguments associated with Keynesian economics.
Fiscal policy: Government decisions about taxation and spending that influence economic activity. Keynesian policy uses public spending or tax changes to support demand when private spending weakens.
Monetarism: A school of thought emphasizing the role of money supply and monetary policy in economic fluctuations. Monetarists challenged Keynesian emphasis on fiscal policy and disputed how monetary changes affect output.
Effective demand: The level of demand that determines firms’ production and employment when resources are underused. Keynes used this idea to explain why an economy can settle below full employment.
The General Theory of Employment, Interest and Money: Keynes’s 1936 book arguing that insufficient aggregate demand can sustain involuntary unemployment. This book presented the framework that became the foundation of Keynesian economics.
Monetary policy: Central-bank actions that influence money, credit, and interest rates. Interest-rate changes can support demand, though their effects may weaken in a liquidity trap.
Rational expectations: The hypothesis that people use available information and economic theory when forming expectations. It questions whether predictable policy can systematically alter real output when expectations adjust.
Marginal propensity to consume: The share of an additional unit of income that households spend on consumption. It helps determine how strongly an initial spending change expands total demand.
Great Depression: A worldwide economic crisis beginning in 1929, marked by severe declines in output and employment. Persistent mass unemployment challenged the adequacy of prevailing explanations and policies.

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