ABSTRACT
The central ideas of the Keynesian theory of macroeconomics are that the level of aggregate demand depends on the level of income, and that in equilibrium the level of income adjusts so that it conforms to the level of demand. This chapter presents these ideas by writing down equations that describe each of the components of aggregate demand, combining them, and solving for the level of Gross Domestic Product (GDP) that equates aggregate demand and output. The consumption function and investment function play central roles. The aggregate demand is the sum of consumption, investment, and government spending. The slope of the aggregate demand function is the marginal propensity to consume. The Keynesian model helps to understand the effects of fiscal policy on the level of activity. In Keynesian theory the economy achieves an equilibrium level of GDP equal to autonomous spending blown up or magnified by the multiplier.
