ABSTRACT
The purpose of this chapter is to show how some of the recent work of Clower 1 , 2 and Leijonhufvud 3 throws light on a number of important issues in Keynesian economics. We begin with a discussion of the validity of Walras’ law in the context of a Keynesian equilibrium which involves an excess supply of labour. From this the conditions under which Walras’ law can be called on to justify the exclusion of the bonds market from the analysis are identified thus providing a more rigorous theoretical backing for the model framework of section 1. The Keynesian ISLM model is extended to explicitly include the bonds market.
