Keynesian introduced a model between employment, interest and money. In which he determined that employment is a self phenomena which corrects itself to the market equilibrium in an economy. Similarly the state of unemployment is also a natural phenomena but it needs to be corrected to revert back to the market equilibrium. With regard to income, he stated that prices and wages are not flexible which results in sticky prices. The sticky prices give a downward push to the utilization of the economic resources which ultimately hampers the economy to reach to the normal real GDP level of the economy.
Keynes is considered to be the greatest economist of the 20th century. He wrote several books. However, his ‘The General Theory of Employment, Interest and Money’ (1936) won him everlasting fame in economics. The book revolutionized macro economic thought. Keynesian economics is called the Keynesian revolution. The central problem in macro economics is the determination of income and employment of a nation as a whole. That is why modern economists also call macro economics as the theory of income determination. Keynes brings out all the important aspects of income and employment determination and Keynesian economics itself can be called macro economics.He attacked the classical economics and effectively rejected the Say’s Law, the very foundation of the classical theory.
There are 2 ways to find National Income Equilibrium .. 1) When the Aggregate demand equal to Aggregate Supply and the 2nd 1 is 2) When the Savings comes equal to Investments ... There we get the equilibrium level.
Keynes presented the concept of determination of equilibrium level of NI, according to Keynes; equilibrium level of NI takes place where aggregate demand is equal to aggregate supply.
The equilibrium level of NI may be at full employment, may be at above full employment and may be at below full employment. According to Keynes the full employment corresponds to the situation of maximum possible level of NI. In other words, full employment represents the maximum level of output which could be obtained by utilizing all the natural and human resources of the economy. Thus if at the level of full employment, aggregate demand is equal to aggregate supply, the equilibrium level of NI will be maintained at full employment. If at the level of full employment, AD is more than AS, the equilibrium level will take place at above full employment.
It is explained as; whenever at the level of full employment, aggregate expenditures exceed the aggregate output, the demand for goods and services will increase. In this situation, the profit of producers will increase. For the sake of more profits, they will increase investment. As a result NI, etc will increase. But at the level of full employment, the output and NI is at its maximum.
