Question

What do Keynesians think cause fluctuations in output? What must be done to maintain full-employment capacity?

Answer 1

According to Keynes fluctuations in output is caused by fluctuations in aggregate demand. Aggregate demand is composed of consumption expenditure, investment expenditure, government expenditure and net exports. Decrease in any of these variable leads to decrease in aggregate demand which further results in fluctuations in output.

Full employment capacity can be maintained by government interventions. Government can either decrease taxes to increase net disposable income or increase government spending. This would increase aggregate demand to the full employment level.