The Keynesian theory -- Persistent or high unemployment comes as a result of insufficient demand. • Classical economic theory is the belief that a self regulating economy is the most efficient and effective because as needs arise people will adjust to serving each other’s requirements. Keynes was considered helpful in the “Golden Age of Economic Growth” after the Second World War, but he is largely ignored now that we have recreated conditions similar to the Great Depression in many countries. Figure 1. Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation. The Pure Keynesian AD–AS Model. What are the advantages and disadvantages of Keynesian Economics? The theory of economics called Keynesian Economics, or Keynesianism, is named after the British economist John Maynard Keynes. The Keynesian theory of the determination of equilibrium output and prices makes use of both the income‐expenditure model and the aggregate demand‐aggregate supply model, as shown in Figure . Thus, changes in AD only affect GDP when below potential output, but only affect the price level when at potential output. While in most cases markets are self correcting, there are times when it fails to correct and requires government intervention. 113– While Keynesian theory in its original form is rarely used today, its radical approach to business cycles, and its solutions to depressions have had a profound impact on the field of economics. British economist, John Maynard Keynes (1883-1946) wrote his seminal "The General Theory of Employment, Interest and Money" in 1935. Five Positive Results of Keynesian Economics. Suppose that the economy is initially at the natural level of real GDP that corresponds to Y 1 in Figure . Keynesian analysis was abandoned in the turbulent 1970s that signaled the end of rapid economic growth. 1. Keynesian economics is back. A Keynesian believes […] The first three describe how the economy works. ... “There are very few economists who really buy into Keynesian theory anymore. Keynesian theories of growth 123 advocate protectionism as a remedy against recession, a provocative suggestion in a laissez-faire oriented environment (Keynes, 1929, pp. Keynes lived from 1883 – 1946, and was considered “the greatest and most influential economist of the 20th century.” (Kangas, 1996). The Keynesian View of the AD–AS Model uses an AS curve which is horizontal at levels of output below potential and vertical at potential output. Although the term has been used (and abused) to describe many things over the years, six principal tenets seem central to Keynesianism. 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