Question

What were the most influential assertions made by Professor Keynes in The General Theory? Were there any economic circumstances that Keynesian Theory did not predict well or prescribe a good response for policymakers to take as a way of effectively dealing with them?

Answer 1

Professor Keynes most influential assertion was role of government in establishing full employment. Full employment can not be achieved in short run under the free market system. Government has to make intervention to correct economic disequilibrium in economy.

Fall in aggregate demand is main cause behind the fall in output and employment. Equilibrium is established at lower level of output. Private investment is discouraged due to fall in profit expectation. Thu, now only government can make expenditure thereby driving up aggregate demand in economy. So eventually, when demand rises, it is followed by the rise in output and employment.

Fiscal policy is more effective than the monetary policy in driving up output and employments.