Understand Keynesian Model and Get Adjustments to Keynesian Model

Keynesian theory is an important theory in economics which describes various types of adjustments made in an economy in context to changes in wages. John Maynard Keynes, the great economist, proposed the theory 1936 during the great depression when people were losing their jobs and the world economy was under great pressure. The theory was found useful in restoring the economy. Many economists have advocated this theory over the classical theory and thus Keynesian theory is still taught in schools and colleges.

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Know More about Keynesian Models

The economic condition of a country is not always equal. Sometimes it is strong and sometimes weak. The Keynesian model also says the same thing. An economy is a balanced economy when everyone has employment and there is a strong demand for products and services that condition is called expansion and the opposite is called a recession.

The Keynesian theory states that prices do not quickly adjust so that it can result in market clearance. Keynes proposed that in absence of quick price adjustment, the actual quantities of output should be evaluated by some other method.

According to the simple Keynesian model, adjustment of quantity or output gives rise to equilibrium. The simple Keynesian model has two building blocks- The equilibrium condition and the set of equations which demonstrate aggregate demand.

The equilibrium condition states that output (income) is equivalent to aggregate demand:

In this model, aggregate supply does not play any role in evaluating the output. Maybe due to unemployed resources, quantity or output is supposed to adjust to meet demand.

The set of an equation which demonstrates aggregate demand states that in a case of a closed economy, three elements of aggregate demand are consumption, investment, and government expenditure.

The equation of consumption function states that consumption is equivalent to autonomous consumption if after-tax income is zero and each single-unit surge in existing after-tax income raises consumption by a fraction 2. Autonomous consumption is independent of income.

In the simple Keynesian model, changes in wages affect the adjustments to price of a product and quantity to be produced.

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Keynesian model is ideal to restore a weak economy to a healthy economy.