Answer to Question #221246 in Macroeconomics for Sylvia

Question

Why did Keynes believe that the government should control the level of aggregate demand in the economy

Answer 1

Keynesian economics is a theory of macroeconomic economic that promotes total economic spending and how it affects employment, output, and inflation. Keynesian is mainly used for Great Depression understanding, and its focus was on short-run economic change. The Keynesian economic view had its focus on aggregate demand. The overall idea was that firms produce output if the production is expected to have a good sell. The Keynesian perspective on the AD and the AS model gives the idea that if there is a horizontal aggregate supply, the demand will decrease, and in turn, the output will decrease, but the prices will not drop. 

Kynes asserted that markets that are free lack self-balancing mechanisms which is one of the things that help the government to have full employment. There is a justification from Keynesian economists that government intervention through various ways, for instance, the public policies, has a goal of achieving total employment and stability in prices.