What is Keynesian Analysis?

Keynesian economics focuses on explaining why recessions and depressions occur and offering a policy prescription for minimizing their effects. The Keynesian view of recession is based on two key building blocks. 

First, aggregate demand is not always automatically high enough to provide firms with an incentive to hire enough workers to reach full employment. 

Second, the macroeconomy may adjust only slowly to shifts in aggregate demand because of sticky wages and prices, which are wages and prices that do not respond to decreases or increases in demand. We will consider these two claims in turn, and then see how they are represented in the AD/AS model.

The first building block of the Keynesian diagnosis is that recessions occur when the level of demand for goods and services is less than what is produced when labor is fully employed. In other words, the intersection of aggregate supply and aggregate demand occurs at a level of output less than the level of GDP consistent with full employment.

Related Topics

• Supply-Side Economics
• Say's Law
• Laffer Curve
• Neo-Classical Economics
• New Keynesian Economics
• Classical Economics
• Supply-Side Economics
• Keynesian Economics
• Keynes' Law
• Keynesian Analysis
• Demand Side Theory
• Market Forces
• Aggregate demand
  
• Aggregate Demand Curve (and shifts)
• Aggregate supply
• Aggregate Supply Curve (and Shifts)
• Aggregate Demand / Aggregate Supply Models
• Potential GDP
• Aggregate Supply and Demand Equilibrium
• Aggregate Supply and Aggregate Demand in Macroeconomics and Microeconomics
• Input-Output Model
• Stagflation
• Growth and Recessions in the Aggregate Demand - Aggregate Supply Model
• Unemployment in the Aggregate Demand - Aggregate Supply Model
• Inflation in the Aggregate Demand - Aggregate Supply Model
• Keynesian, Intermediate, and Neoclassical Zones