Keynesian theory addresses demand shocks from "summary" of EBOOK: Macroeconomics by Rudiger Dornbusch,Stanley Fischer,Richard Startz
Keynesian theory emphasizes the importance of aggregate demand in determining the level of economic activity. According to this theory, fluctuations in aggregate demand play a key role in driving fluctuations in output and employment. When aggregate demand falls, businesses respond by reducing production and laying off workers, which leads to a decrease in overall economic activity. Conversely, when aggregate demand rises, businesses increase production and hire more workers, leading to an increase in economic activity.
One of the key insights of Keynesian theory is that economies can experience periods of insufficient aggregate demand, leading to unemployment and underutilization of resources. In these situations, the government can play a role in boosting aggregate demand through fiscal policy. By increasing government spending or cutting taxes, t...
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