ABSTRACT

This chapter focuses on the macroeconomic adjustment process. The most important test of Keynesian theory is its ability to provide ways to reduce unemployment. Macroeconomics, as a guide to economic policy, is therefore the most immediate practical extension of the ideas in the General Theory. It shows how Keynesian theory can be used to intervene effectively in the economic cycle and its consequence, unemployment. Today's macroeconomics is built around core Keynesian notions put forward in the General Theory, regardless of whether economists accept or reject these notions. The two pairs, IS-LM, are one of the most widely used models in macroeconomics. The chapter explores how Keynes established the relationship between prices, the interest rate, and unemployment. To incorporate flexible prices into the IS-LM model, the chapter explains the role of prices in market equilibriums. It also focuses on Wicksell and Hayek, to the extent thought mirrors Keynes's own developing ideas.