Answer to Question #261325 in Economics for Aasvoel

Question

Simple keynesian model without a government or foreign sector

Answer 1

Content of the Keynesian model. In 1936, J. Keynes's work "The General Theory of Employment, Interest and Money" was published, in which he tried to explain the nature of short-term fluctuations in general and the causes of the Great Depression in particular. The scientist believed that the main reason for recessions and depressions is the inadequacy of the aggregate demand for goods and services. J. Keynes came to the conclusion that only long-term results of economic policy are analyzed in classical economic theory. A few years before the appearance of this study, Keynes spoke of classical economic theory as follows: “Analyzing the economy over long periods of time only disorients us. "Someday we will die. Economists looking at the economy, in the long run, are trying to solve a problem that is too simple, no one needs an answer. We are in the middle of a hurricane, and they insist that when the storm is over, the ocean will calm down."

Keynesian model of general economic equilibrium is based on the following provisions:

1) Keynesians consider an economy in which there is no flexibility in declining prices and wages;

2) if the classics argue that economic actors act rationally and do not make mistakes, Keynesians emphasize that people are subject to monetary illusions;

3) for the followers of J. Keynes, the monetary and real sectors are interconnected and interdependent. If for the classics money is only countable material, then for Keynesians it represents a special kind of wealth.

Unlike the classics, who proceed from the priority of the labor market, Keynesians emphasize the importance of the market for goods, with priority being given to aggregate demand.