Keynes and demand-side economics

The
Keynesian macroeconomic analysis begins with the proposition that the economy
may not always be at the full employment equilibrium. In other words, it is
possible for aggregate demand to fall below or exceed the level require to
achieve or maintain full employment. In the former case, there will be
significant resource unemployment while in the later; there will be inflationary
pressures on prices (including wages). The Keynesian proposition rests on the
theory that prices and wages may not be very flexible as to permit the
automatic adjustment of the economy to the full employment output level. For
sure, prices and wages, while flexible upward, tend to be rigid downwards in
the real world. In other words, prices and wages do not readily move downwards
(fall) when there is such need as they do easily move upward.

This
is attributed to market imperfections such as the presence of middlemen and
labor unions that work to prevent prices and wages from falling even in the
face of low aggregate demand and resource unemployment. Keynes carried out his
analysis during the great depression that visited Europe and America between
1928 –1934. The depression was characterized by low and declining output,
massive (significant) unemployment and low prices. Keynes asserted that the
depression could be attributed to low aggregate demand. Output employment and
prices are low because aggregate demand is low. Hence, a deliberate attempt
should be made by the government (through the relevant authorities) to
stimulate aggregate demand.
In
Keynes reasoning, since there is increase output and employment but leave the
aggregate price level unchanged. Demand-side (Keynesian) economics is concerned
with how the level of economic activities (output, income and employment) could
be varied by policies that influence society’s aggregate demand. This can be
achieved by taking policy actions that affect any of the components of
aggregate spending in the economy (household consumption expenditure, business
investment, government direct expenditure and net exports).

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