Keynesian theory is an assumption of aggregate demand (economy’s total spending) and its influence on inflation and output.There are six principal doctrines which seem essential to this theory with the 1st three describing the functioning of the economy and the other three differentiating Keynesian from the other economists.
Keynes has the belief that total demand is manipulated by economic decisions both private and public with sometimes behaving erratically. The most prominent public decisions are fiscal and monetary that is tax and spending policies. Some years ago, economists debated on relative power of fiscal and monetary policies with some of the Keynesians in opposition that monetary policies are powerless while some monetarists were on the contention that fiscal policies are powerless.
Almost all monetarists and Keynesians today consider that both monetary and fiscal policies have effect on aggregate demand. According to Keynes school of thought, the changes in total demand either predicted or unpredicted have a great short run effect on employment and real output but not on the prices. Expected monetary policy is able to generate valid effects on employment and output only when some prices are constant; if not, any introduction of money would alter the prices by same percentage. This is to mean that Keynesian models assume rigid wages or prices.
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